What Is a Pump-And-Dump?
A pump-and-dump is a scheme in which the perpetrators inflate the price of an asset they hold such as a cryptocurrency, typically building unfounded hype around it with false or misleading information. They will then dump all of their holdings when demand from new traders and investors lifts the price, flooding the market and leaving the new buyers with a worthless asset.
The U.S. Securities and Exchange Commission (SEC) imposes heavy fines on perpetrators in securities markets. However, the complexity of blockchain technologies, the opacity of cryptocurrency pricing, and the desire among investors to find the next bitcoin (BTC) to make massive gains have made cryptocurrencies an attractive target.
How Do Pump-And-Dumps Work?
In a crypto pump-and-dump scam, the perpetrators claim to have in-depth knowledge about the coin or token project that supports their claims about the potential for the price to soar. They typically use social media to spread their claims and often involve influencers or celebrities to promote the project to their followers.
Once the price has jumped in response to buyers clambering into the market, the scammers take their profits, and the large volume of sales causes the price to crash.
How to Avoid Pump-And-Dumps
To avoid falling into the trap of buying into a pump-and-dump, you should be wary of unsolicited offers, avoid crypto projects that sound too good to be true, and conduct your own research.
Consider following these steps to protect yourself:
- Thoroughly research the cryptocurrency and its fundamentals before investing
Prior to investing in any cryptocurrency, it is important to conduct comprehensive research. This entails delving into the background of the project’s team, studying the project’s roadmap and whitepaper, and analyzing the cryptocurrency’s market capitalization and trading volumes.
Additionally, be vigilant for any warning signs, such as fabricated news stories or excessive hype on social media.
- Utilize technical analysis to identify unusual price fluctuations
Technical analysis can serve as a valuable tool for detecting abnormal price and volume fluctuations in the crypto market. By using charts and indicators, you can analyze the price and volume data of a cryptocurrency, allowing you to identify peculiar patterns or trends.
For instance, sudden price spikes or unusually high trading volumes might indicate the presence of a pump-and-dump scheme.
- Avoid making decisions driven by hype and FOMO
One of the usual ways investors fall victim to crypto pump-and-dump schemes is by succumbing to hype and FOMO (fear of missing out). It is recommended to refrain from investing in a cryptocurrency solely based on hype or FOMO on potential profits.
Instead, make well-informed investment choices rooted in thorough research and analysis.
- Stay up-to-date on news and market trends
Remaining informed about current news and market trends can help identify potential pump-and-dump schemes before they materialize. Follow reliable news sources and stay abreast of market trends and advancements in the overall industry.
This will allow you to make informed investment decisions and steer clear of falling prey to pump-and-dump schemes.
Anyone trading or investing in cryptocurrencies needs to be wary of pump-and-dump schemes. While the practice is illegal in the securities markets, the lack of regulation in cryptocurrency markets means it has become increasingly common.