Have you familiarized yourself with the basics of crypto, but remain unsure whether you are ready to try your hand at trading or investing? Are you apprehensive about making the jump into this evolving asset class because of concerns about crypto dumping? Have you heard horror stories about your peers losing big on crypto pump-and-dump schemes?
Hesitancy is understandable given crypto pump-and-dump schemes have become widespread. However, you mustn't let fear of these schemes prevent you from capitalizing on legitimate, cryptocurrency investment opportunities.
Instead, you should learn how to spot crypto pump-and-dump schemes to protect yourself from them.
What is a Pump And Dump Scheme?
Crypto pump-and-dump schemes loosely resemble Ponzi schemes. The latter uses money from new investors to pay older investors. A few prolific Ponzi schemers include Charles Ponzi, Lou Pearlman and Bernie Madoff.
Pump-and-dump fraud tactics use a similar money-shuffling strategy. In these schemes, a handful of coordinated “investors” will begin buying a particular crypto coin.
Their investment will raise the asset's price, encouraging unwitting investors to buy in as the price increases, pushing up the price even further. At a certain price point, the “pumpers” will dump their holdings and take profits. Their exit drives down the price, hard and fast, leaving those outside the inner circle holding onto assets now showing a loss.
While crypto pump-and-dump schemes have garnered attention recently, this tactic has long been seen elsewhere in the financial world, such as penny stocks. For a more detailed look into these schemes, review this critical examination of the crypto pump-and-dump ecosystem.
How Do Crypto Pump-And-Dump Schemes Work?
At the outset of a new scheme, a group of insiders will be notified which crypto asset they should purchase. The insiders will then begin buying up units and the resulting price action often stimulates outside investors to buy in boosting prices.
As part of their coordinated efforts, insiders will also hype up the asset on social media. If these promotional efforts gain traction, it’s often a matter of days, sometimes hours, before the asset goes viral amongst the wider crypto community.
Following, all the insiders have to do is wait for the price to rise as the community buys what they believe is crypto’s next big thing. Once an investment in the asset reaches a fever pitch, the inner circle will rapidly cash out, with a healthy profit, causing the price to plummet.
5 Ways to Recognize a Crypto Pump and Dump
Before buying into hype remember the points below to help identify and avoid pump-and-dump schemes:
Check in with Your Crypto Broker
If you are actively involved in trading, you should use a broker— especially if your trading centers around cryptocurrency. A great broker can help you determine whether an opportunity is too good to be true because they live the crypto markets day-to-day and have experience spotting the warning signs. There are other noteworthy reasons you should use a crypto broker.
Hype Around New Crypto
When a new coin suddenly shows up on your radar, you should approach it with a healthy amount of skepticism. Find out when it was created. If it is only a few months old and rapidly gaining steam, you may want to take a wait-and-see approach.
Aggressive Advertising
Pump and dumpers frequently advertise their latest fraud on various social media platforms, such as Twitter, Reddit, Telegram and Discord. This approach attracts buyers and drives up the value as fast as possible so insiders can benefit from investors’ FOMO-fuelled, overzealousness. If your social media platforms are flooded with ad after ad about a single cryptocurrency, there is a good chance it is a scheme.
Identical Messages Across Social Media
Identical messaging is another telltale sign that a cryptocurrency is part of a pump-and-dump scheme. Bad actors in a hurry to turn a profit won’t waste time creating new messaging for each social media platform. Instead, they will just plaster the same messages across all channels.
Celebrities or Influencers Advertising the Coin
Celebrities and social media influencers sell their influence. Bad actors sometimes use this to draw attention to the coin they intend to pump and dump.
Sudden Price Hikes in Not Well-Known Cryptos
Has an unknown coin suddenly experienced a major price hike? If so, be wary. This might be the work of fraudsters.
Protecting Yourself from Crypto Pump-and-Dump Schemes
If you want to prevent yourself from falling victim to one of these heinous schemes, you should:
Create an Investment Strategy
Create a sound investment strategy that aligns with your financial goals and ability to absorb risk. This strategy will help you avoid being drawn into schemes, as many of these rapidly appreciating assets will not fit robust investment strategies.
Do Your Own Research
The best way to protect yourself is to do your own research. As part of this research, you should consider consulting with a crypto broker or financial adviser.
While they may not have all of the answers, these professionals should be able to assess the potential benefits and drawbacks of an investment through a different lens. This insight will help you make a more informed investment decision.
Invest Small Amounts
If you are enthralled by the idea of purchasing the latest crypto coin but aren’t sure whether it's a legitimate investment, start small. It is better to limit your exposure rather than to invest a high percentage of your investment capital.
Only Invest What You Can Afford to Lose
What would you do if the value of one of your investments suddenly fell to zero? If the mere thought of losing it all to a particular crypto shocks you to your core, then you are overstretching your assets. On that note, only invest what you can afford to lose.
3 Steps to Take if You’ve Fallen Victim to A Pump and Dump
If you follow all of the above advice and still fall victim to an elaborate pump-and-dump scheme, you should immediately do the following:
Sell Your Position
If you haven’t done so already, sell your position immediately. Now is no time to adhere to the hold-on-for-dear-life (HODL) methodology. Instead, ditch your position and recover as much as possible. Following, make sure to disconnect any wallets from the platform and project as a precautionary security measure
Report the Scam
After taking steps to protect yourself, report the scam to the Commodity Future Trading Commission and the Federal Trade Commission. You should also notify the Internet Crime Complaint Center. To help other investors avoid falling victim to the scheme, take to social media groups and spread the word.
Find a Crypto Broker
Finally, you should find a reputable broker familiar with the intricacies of trading crypto. This professional will help you avoid repeating your mistakes in the future.
Do Your Research and Use a Broker
As you can see, it is perfectly possible to join in on a crypto’s surge, turn a profit and protect yourself from fraudsters. However, to accomplish all three, you should partner with a reputable broker and do plenty of research.
Benzinga can help with the latter with the Pro platform, which gives you access to real-time trading signals, intelligent chat rooms and the latest news on crypto and traditional stocks. Start a free trial and see the platform in action.
Frequently Asked Questions
Is crypto pumping and dumping illegal?
Yes, pumping and dumping and other market manipulation tactics are illegal. People found in violation can face federal charges for fraud and other offenses, which are punishable by fines and imprisonment.
How do you know whether a coin is pumped?
You should look for signs such as a rapid rise in value and pushy marketing. The more warning signs you see, the higher the chances a pump-and-dump is underway.
How do you find crypto coins before they release?
You will need to sign up for updates from a platform that provides cryptocurrency news, such as Benzinga.