What are Pump and Dump Schemes in Crypto?
The crypto market is popular for being both volatile as well as easily influenced by public perception. In such a sensitive market environment schemes and scams and likely to enter the ecosystem and possibly even become prevalent. A famous and common example of one such kind of scheme that many users fall prey to is a Pump and Dump Cryptocurrency Scheme.
Pump and Dump Cryptocurrency Scams are not a very new phenomenon, and have plagued the business for quite a while now. These kinds of schemes have been harnessed by people not just to deceive crypto users, but also to Mislead and swindle other asset classes.
Gaining an in depth knowledge of Pump and Dump schemes is necessary in order to learn how to stay safe from them and protect your digital currencies by making informed investment decisions. Hence, in this article we will take you through what exactly is a pump and dump scheme and how can you spot such a scam and stay protected.
What is a pump-and-dump scam?
Let’s first understand the basics of a Pump and Dump Scam. A cryptocurrency pump-and-dump scam is a type of market manipulation in which a group of individuals coordinates to buy a particular cryptocurrency, often a small or obscure one, and artificially inflate its price through untrue and misleading statements.
This can be done through tactics such as spreading false or exaggerated information about the cryptocurrency, creating a sense of hype or urgency to buy, and getting a large group of people to buy into the cryptocurrency simultaneously. Once the price has been pumped up, the perpetrators of the scam will “dump” their own holdings of the cryptocurrency, selling them at the now-higher market price and pocketing the profit. This can lead to significant losses for those who bought into the cryptocurrency based on the false hype.
What is the working Mechanism of a Pump and Dump scheme?
A Pump and Dump scheme facilitates making a price of a worthless asset plummet significantly. These assets are often useless and have a very low market cap.
The first step in initiating such a scam is the “pump” aspect. This involves a scammer entity, which could either be an individual or even a group of people, who put their money into investing in an asset that is of very insignificant and low value. Then follow this up by raising the value of the asset in the minds of the users.
This can be done by spreading fake positive hype around the purchase and creating false news that would result in people believing that the asset could be profitable. Through such promotion tactics that often harness the power of social media, scammers are able to create a demand around the investment which attracts users. This kind of popularity gives rise to a fear of missing out on the public who then become enticed and hence susceptible to investing in the asset.
Next is the “dumping” stage. This is when the price of the asset starts to soar and rise and the scammers begin to trade or sell the tokens at a “grossly inflated price”. When the selling of these overpriced and hyped assets occurs, especially in large numbers by the sellers, it results in the value to depreciate and assume a more realistic valuation, which is in fact very low. In the end, the swindlers make massive profits leaving the investors with valueless tokens and monumental losses.
Laws against Pump and Dump scheme
There are various legal provisions that prohibit pump-and-dump schemes in the securities market. One such example is the Securities Act of 1933, which makes it a criminal offence “to obtain money or property through the use of false or misleading statements or omissions of material facts.” Another relevant law is the Securities Exchange Act of 1934, which also contains provisions against this type of fraud. In addition, a pump-and-dump scheme may be considered wire fraud due to the use of communication channels, such as email, messaging apps, social media, or phone calls, to promote the fraudulent stock.
How to Avoid a Pump and Dump scheme
Do your own research: Don’t just blindly trust promotional materials or tips from strangers. Look up information about the company or cryptocurrency in question and evaluate it critically. Research is especially necessary if you are investing in coins at the initial coin offering (ICO) phase. Reading the white paper of the token can be one such step to doing good research.
Be wary of unsolicited offers: If you receive an unsolicited offer to buy a particular cryptocurrency, be cautious. This is especially true if the offer comes with a sense of urgency or pressure to act quickly.
Be suspicious of unusually high returns: If an investment opportunity promises unusually high returns with little or no risk, it is likely too good to be true. Be especially wary of investments that promise quick profits.
Trade safely: One of the best ways to avoid such scams is by resorting to trading using safe and trustworthy exchanges. They have security measures and strict restrictions in place that can likely prevent the listing of coins that could possibly be part of a pump and dump scheme.
Learn about red flags: There are certain red flags that can indicate the presence of a pump-and-dump scheme. For example, if you see a sudden surge in the price of a cryptocurrency without any apparent reason, it could be a sign of a pump-and-dump.
Avoid following the crowd: It can be tempting to join a group of people who are all seemingly making money from a particular investment. However, remember that if something seems too good to be true, it probably is. What are Pump and Dump Schemes in Crypto?
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