How To Spot A Crypto Pump And Dump

People have used pump-and-dump schemes in the traditional finance world for many years. This particular fraud scheme typically used to happen in the stock market.

How? First, a small group of investors would buy a company's shares worth very little in price. This would cause the shares to suddenly go up in price.

Afterwards, they would pay boiler rooms or call centre staff, like in the movie The Wolf of Wall Street, to call other potential investors to persuade them to buy the stock. These people tricked the other investors by saying the stock was about to go up in price fast.

Once enough people had bought the stock and the price had gone up enough, the initial investors sold their shares quickly, causing the price to drop and the other investors to make huge losses.

Pump-and-dump schemes and projects have found their way into the cryptocurrency world, but instead of using call centres, they are done by spreading hype and misleading information about a coin or token on social media.

This article explains how these schemes work and how to recognise and avoid them.

What does pump and dump mean in crypto?

A crypto pump and dump is a type of scam where individuals or groups deliberately inflate a cryptocurrency's price and demand by spreading false or misleading information to increase the price.

Once the price is high enough, they sell off all the crypto they're holding, causing it to collapse. As expected, the traders and investors who still had the coins in their wallets would suffer heavy losses with no way of getting their money back.

The goal of a pump and dump is to make quick money through manipulation at the expense of unsuspecting traders, investors and their money/assets.

Examples of pump and dump schemes

SafeMoon (SAFEMOON)

SafeMoon was offered as a cryptocurrency that would give high returns to traders and investors. It gained social media popularity and increased in price, pulling in thousands of investors.

Unfortunately, it was all hype by pump and dump merchants.

Once the price reached as high as they wanted, they sold off and left the coin to crash, causing significant losses for traders.

VikingsChain (VKG)

VikingsChain (VKG) is popularly known as a pump-and-dump token. There have been many instances in the past where this particular crypto has risen rapidly and then crashed heavily.

For example, in November 2021, VKG increased by 350% after Elon Musk tweeted about the moon and the Vikings.

How To Recognise A Crypto Pump And Dump

Here are four signs to help you recognise a crypto pump and dump:

1. Sudden Increase in Price and Trading Volume

A sudden and significant rise in a cryptocurrency's price is usually the first red flag pointing out that it may be a pump-and-dump scheme. This price increase is also followed by high trading volumes, giving the impression that the demand for that cryptocurrency is real.

The pump and dumpers use this high price and volume to convince investors to buy the crypto. The more they buy, the higher the price moves up. Then when it reaches a particular point, the pumpers will sell and leave the investors stuck with a useless token.

2. Lack of Practical or Genuine Value

There are over 5000 cryptocurrencies in the market, and most have no practical use or value, making them an excellent choice for pump-and-dump schemes.

Due to their lack of genuine utility, their price can easily be manipulated by scammers, who mislead the public that the cryptocurrency is more valuable than it actually is. They may also use technical jargon and unnecessarily complex grammar to mislead investors and traders.

3. Excessive Social Media Hype and Promotion

Pump-and-dump scammers use excessive social media hype and promotion to generate buzz and attract attention to a cryptocurrency. They even go as far as sharing fake news stories and paying influencers or micro/fairly popular celebrities to advertise the crypto to their followers and the general public.

This hype pulls in unsuspecting traders looking for a quick profit or "the next big crypto". They buy the coin, push for an increase in demand and price, and then the pump-and-dumpers swoop in, sell off, gain and leave the coin to dump.4. Lack of Transparency

Crypto pump-and-dump schemes are usually run by anonymous persons or groups, making verifying their information or identity hard.

They may conceal their identity by using fake names, addresses, locations, and other personal details. This lack of transparency should be an automatic red flag for any investor.

How to Avoid Pump and Dumps in Crypto

Crypto pump-and-dump schemes can be very tempting because they promise a quick, easy profit. Here are five ways to protect yourself (and your funds) from falling for these schemes.

1. Do Your Own Research Before Investing

A recurring piece of advice in the crypto community is DYOR - Do Your Own Research. Before buying even $1 worth of any crypto, find out details of the cryptocurrency, like its whitepaper, market cap, trading volume, utility, developers and roadmap.

It is also advisable to look for warning signs such as excessive hype on Twitter, Facebook, Discord, Reddit, Youtube, or other social media platforms and fake news stories from shoddy blogs or low-quality websites.

2. Use Technical Analysis to Identify Suspicious Price Changes

Technical analysis is a valuable tool for recognising abnormal prices and trading patterns of a cryptocurrency. You can use charts and indicators to assess price and trading volume changes. For example, sudden increases in price or trading volume can be signs of a pump-and-dump scheme.

3. Avoid Buying Cryptocurrency Because of FOMO

FOMO(Fear of Missing Out) is a common feeling, and pump and dumpers utilise it to lure investors into buying a coin. As a trader, it is in your best interest to avoid buying coins or tokens based on fear of missing out. Instead, make investment decisions solely based on proper analysis.

4. Stay Up-to-Date on News and Market Trends

Knowledge is power. Pay attention to industry news and market trends to help you identify potential pump-and-dump schemes before or immediately after they start happening. Follow reputable news sources and social media accounts, like Obiex, to stay updated on valuable news, tips and information.

5. Be Skeptical of The Crypto Promoters

Pump and dumps are often organised scams, usually planned in online telegram, Twitter and discord groups.

If you suddenly see promotion posts from several suspicious accounts or accounts without any prior crypto history, that may be the beginning of a pump and dump.

If a relatively unknown coin with a low market cap starts showing up on Facebook/google ads or trending on Twitter, or you get an unsolicited message on WhatsApp, Twitter or any social media inviting you to invest in a coin, tread cautiously.

Some Telegram, WhatsApp, or Discord groups that offer crypto trading signals may be peddling pump-and-dump schemes. Crypto trading signals are pointers towards a cryptocurrency that may be worth investing in or indicators that you should either buy or sell to make a profit.

These trading signal groups appeal to new traders with limited experience, who in turn fall victim to pump and dumps quietly pushed by these group admins.

If a random influencer with no crypto background or experience starts promoting a coin, it's possibly a scam, and you should stay clear of it.

To Recap

Pump-and-dump crypto schemes are disasters waiting to happen. They are also illegal, with severe consequences for people who organise and participate in them. They are a major problem in the crypto community, and the tips in this article will help you avoid them.

Be careful of any crypto that suddenly goes up in price or starts trending online. To avoid falling for pump-and-dump scams, do your own research, use technical analysis to identify trading abnormalities, avoid FOMO and stay updated with the latest crypto news.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.