Crypto Pump and Dump Scams – What They Are and How to Avoid Them
Also known as rug-pull scams, pump and dump scams are a well-known type of scam that is plaguing the crypto industry. In 2021, pump and dump scams accounted for 37% of the year’s crypto scam revenue, taking over $2.8 billion worth of crypto from traders.
Pump and dump scams are widely considered low-risk since the crypto market is so unregulated and trading is anonymous. It is incredibly difficult to catch scammers after they successfully disappear with their victim’s money.
To prevent themselves from falling for a pump and dump scam, traders should understand what this scam is, how to identify it, and how it can be avoided.
What Is a Pump and Dump Scam?
A pump and dump scam is a popular scam that originated in the stock market and has gradually crept into the crypto space. Scammers will mislead traders through misinformation to convince them to invest in a particular asset, such as cryptocurrency. This is the “pump” part of the scam, with its purpose being to significantly inflate the asset’s price. After victims decide to invest their money and the asset price rises, the scammer will then sell all their holdings and disappear (the “dump” part of the scam). This crashes the price of the asset, leaving victims at a loss.
Scammers will begin a pump and dump scam by choosing a suitable target, small crypto coins, as these are the easiest to manipulate and don’t take many traders to inflate the price.
Key Signs of a Pump and Dump Scam
Since pump and dump scams rely on misinformation, traders need to be able to identify the key signs of this type of scam.
Sudden Price Increase for Unknown Coins
During this scam’s “pump” phase, smaller and lesser-known coins will experience rapid growth over a short period. This means that scammers have already found many victims that have invested their money in a particular coin. Due to the fear of missing out (FOMO), traders will be tempted to follow suit and invest in the coin too, hoping to make a profit. However, if you notice a sudden price increase for a cryptocurrency that you have never heard of before, then it’s best to steer clear of it.
Multiple Celebrities Endorsing the Same Coin
To gather victims at a larger scale, scammers will often pay off celebrities and influencers so that they back a particular coin. Most of the time, these celebrities and influencers don’t even realise that they are participating in a pump and dump scam. They will usually be offered either money or a portion of crypto to make a social media post that mentions the coin. They may even have a copy-and-pasted message created by the scammer and all they have to do is post it to receive a payment. So, if you notice a celebrity or influencer posting about a cryptocurrency, they are probably unknowingly (or even knowingly) participating in a pump and dump scam.
Aggressive Advertising on Various Platforms
Another tactic pump and dump scammers will use is aggressively advertising a cryptocurrency across various online platforms. An unknown coin will typically pop up all across the internet on platforms such as YouTube, Facebook, and Google as scammers try to entice as many victims as possible. They will also flood Discord and other social media platforms with messages to convince traders to invest in a certain coin.
If you see a small cryptocurrency with an aggressive advertising campaign, you can safely assume it is part of a pump and dump scam. Small coins with legitimate companies backing them will not gain traction as fast as pump and dump coins will, so always remain sceptical when seeing crypto advertisements,
How to Avoid a Pump and Dump Scam
To avoid pump and dump scams, you should always have your guard up. The general rule is that if a crypto investment seems too good to be true, then it likely is. If you are tempted to invest in a small altcoin that you believe has the potential to rise in price, then we suggest only investing a small amount to begin with. You should also always remember to only ever invest money that you can afford to lose. Even if a lesser-known coin is not part of a pump and dump scam, it is still a risky asset to invest in.
Additionally, we recommend that traders set an investment plan before they begin trading. This means assessing your own risk tolerance and trading budget. You can also decide beforehand which coins you want to invest in and what percentage of your crypto portfolio will be altcoins. If you make a trading plan and stick to it, you’re less likely to fall for pump and dump scams.
How to Safely Invest in Crypto
If you’re a beginner or first-time trader, then don’t be discouraged by the possibility of running into a pump and dump scam! If you want to invest safely and with extra guidance, you can benefit from signing up for a crypto platform. These platforms connect traders with regulated brokers who can help them navigate the cryptocurrency market and make informed trading decisions.
Popular and full-featured crypto platforms we love include Kraken, Coinbase, and Immediate Edge. With these platforms, you can receive top-notch guidance from professional brokers who can help guide you to success! Although these platforms are best suited for beginner traders, those of all trading experience levels can benefit from the support they provide!
To conclude, pump and dump scams are a common type of scam that is causing havoc in the crypto community. Both inexperienced and experienced trades can unknowingly invest in a cryptocurrency that scammers are artificially inflating. To avoid joining the many traders who have experienced financial losses due to pump and dump scams, it’s vital to know which key signs to look out for. If an unknown coin suddenly inflates in price, is being advertised on social media platforms, or is being endorsed by multiple celebrities online, then it is likely part of the scam.
Of course, avoiding a pump and dump scam is easier said than done. However, if you remain cautious when trading, extensively research all coins before investing, and stick to your trading strategy, then you have a significantly lower chance of becoming a scammer’s next victim!