Pump and dump schemes within the stock market have been around for decades. And even though cryptocurrency is relatively new, they are subjected to the same old types of scams like the cryptocurrency pump and dump scam. Pump and dump schemes are alive and kicking in the cryptocurrency market due to their unregulated nature, and scammers don’t easily get caught. 2021 has been a busy year for cryptocurrency scams and crypto investors should remember that many cryptocurrencies are vulnerable to these crypto pump and dump schemes.
Cryptocurrency pump and dump schemes take advantage of people and FOMO (fear of missing out), while scammers generate big profits. Often these schemes involve influencers who are given financial incentives to tell followers to purchase a certain digital coin, so the value of the coin is raised.
What is a pump and dump scheme?
A pump and dump scheme usually involves stocks. Scammers generate interest by creating false hype around a stock. By doing so, investors start buying shares, which raises the price of the stock. When the price reaches a certain high, the scammers will sell all of their shares which causes the stock price to plummet and leaves new investors with a massive loss.
Cryptocurrency pump and dump scams work pretty much the same as with stocks. The term “pumping” means the purchasing of large quantities of digital coins to create hype which raises the price of the coin.
How it works
A certain digital coin is pumped up to increase its value. When the value increases to a certain price, the individual or group of scammers dump their coins into the FOMO they created, which results in a price crash, leaving new buyers with a lower coin value than they were purchased at. This creates significant and, in most cases, unrecoverable losses.
While bitcoin is now considered an accepted alternative asset class with regulated exchanges, institutional investor interest, and its own futures contracts, many altcoins still operate in a ‘wild west’ type environment. Almost all cryptocurrency pump and dump schemes target these low capitalization cryptocurrencies because they are easily manipulated with low trading volumes.
The price of a coin is pumped by spreading hype and fake information on social media. A common way to pump a coin is by posting in the comments section of cryptocurrency-related videos on Youtube. In the comments, scammers will hijack discussions and post comments about a digital coin they are trying to create hype around.
As the comments in the image below show, the type of comment is easily recognizable. The comment typically starts with a thank you and is followed by an inquiry about a certain coin. These comments are posted on many channels, which creates the impression there is genuine hype around a coin.
Pump and dump groups communicate on encrypted messaging services like Discord and Telegram, where groups can have several thousand members who can enter upon invitation. In these group chats, the scammers will promote a digital coin and announce it open for purchase, after buying assets themselves. After the announcement, other group members invest in the coin and talk about the coin on social media, blogs, and sometimes even on reputable media channels through paid-for sponsored content. This creates hype, which increases the price of the coin. Once the price is high enough, the initiators of the pump sell their assets, followed by other group members, which causes the price to collapse. This leaves investors who invested after the price surge with big losses, and the scammers gain huge profits.
How do you spot a cryptocurrency pump and dump before it happens?
Cryptocurrency pump and dump scams are usually easy to identify. The main giveaway is when the price of an unknown coin suddenly rises without reason. This spike can easily be spotted on coin charts like the image below. Coincheckup has set a benchmark of a 5% price increase in less than five minutes as an indicator of a crypto pump.
If you are unsure about a new coin, you should be careful when you see paid news articles about the coin in combination with a steep increase in social media conversation about that particular coin. This could be an indicator of a cryptocurrency pump and dump scheme.
Also, be wary of influencers who hardly mentioned cryptocurrency, but suddenly start promoting a coin.
Is pump and dump illegal?
Pump and dump schemes for stocks, yes. Cryptocurrency pump and dump, no. The stock market is heavily regulated by The Securities and Exchange Commission that investigates securities scams such as insider trading and pump and dumps. Cryptocurrency is not yet regulated and the SEC doesn’t plan on implementing crypto regulations any time soon.
How do you avoid cryptocurrency pump and dump scams?
Besides watching for the indicators described earlier, it is important to remove any FOMO from your decision-making process. It may seem like everyone is getting rich in cryptocurrency, but there are as many wins as losses.
Before investing, do your due diligence. Remember that crypto coins are easy to create. So if there is a new coin that is supposedly going to make you rich, do some cryptocurrency investigation. The initial coin offering, or ICO, will have a “white paper” with details about the coin, founders of the coin, their objective, etc.
When it comes to investing in cryptocurrency, rule number one is: don’t invest more than you’re willing to lose.
Learn more about tracking a Bitcoin transaction.