Pump-and-dump schemes are a must-watch out for if you are trading cryptocurrencies. It is a major means of conducting fraud in the cryptocurrency industry.
Pump-and-dump schemes refer to cryptocurrency projects that are given undue importance through artificial methods of inflating their value. The already overvalued asset is then sold at a profit, which will affect its liquidity and result in the eventual crash of the coin. Pump-and-dump schemes are attempts by scammers to disrupt the market and make use of the relatively high opportunities and the lack of regulatory oversight to make sales for their benefit.
Pump-and-dump scams are often orchestrated on decentralized assets that do not have any inherent value. Unsuspecting investors are attracted to such schemes and will eventually lose money after getting hold of unworthy tokens.
Different Phases Of A Pump-and-dump Scheme
It is important to know about the workings of a crypto pump-and-dump scheme to identify and avoid them. The crypto pump-and-dump scheme is orchestrated in four main phases.
Pre-Launch Phase
In the pre-launch phase, a relatively unworthy token is selected by the scammers to be marketed as a token with the potential for high profit. This is the stage when the hype is built around the token; the higher the hype, the more investors are attracted to the project.
In the pre-launch stage, the scammers will promote the tokens on all social media platforms like X, Discord, and Telegram. Less vigilant investors may fall prey to the amazing benefits proposed by the scammers.
Pump-and-dump schemes will also arrange an allowlist or a pre-sales event to promote tokens. That means selected users are given early access to the tokens. They also give discounts for various tokens. In the pre-launch phase, the scammers create a sense of urgency and importance so that investors flock to the project.
Launch Phase
In the launch phase, the scammers will employ crypto shillers or influencers with a large following on various social media platforms to promote their pump-and-dump schemes. They create a sense of missing out on something important. Scammers can even use those investors included in the allowlist or presales stage to canvass new investors.
Pump Phase
In the pump phase, the price of the token will skyrocket as many investors have already invested in the token through presales and allowlist. Due to the illusion of missing out created by the shillers, new investors will buy the tokens even at higher prices. This will in turn boost the price of the token as well as increase its demand among the investors.
Dump Phase
In the dump phase, scammers dump their holdings in a massive sell-out scheme. The token’s liquidity in the market will be disrupted. They will have a high supply exceeding the token’s demand. The panicked investors will sell off their holdings, further worsening the situation. The scammers will thus earn huge profits, while the investors will have to sell off their coins at a lower price.
Red Flags To Look Out For In A Crypto Pump-and-Dump Scheme
Here are some red flags for you to spot a pump-and-dump scheme.
- Do not invest in a token that allocates a sizable part of the token supply for the developers or any other single entity. You should also check the vesting periods for the token founders to figure out any chances of scam.
- The founder’s reputation and their previous projects are a matter of consideration for identifying a pump-and-dump scheme. Check whether the founders and developers have been involved in any previous scams. Visit their social media handles to ensure their credibility.
- Some tell-tale signs of a pump-and-dump scheme are visible on social media. They may turn off the comment options, have an unduly high number of followers despite the scheme’s young age, and there are likely instances of false engagement.
Also, Read: How to Read Crypto Charts
The Bottom Line: Avoiding Pump-and-dump Schemes
Pump-and-dump schemes cause huge money losses for crypto investors. The scammers are using smarter technologies to avoid getting detected.
You should use data analytics and logic to analyze the profitability of a cryptocurrency project before investing in it. Do not make hasty investment decisions and fall prey to the unnecessary hype created around a cryptocurrency. A little care can help you avoid a major loss of money.
