Cryptocurrency is a relatively new investment option that has grown in popularity in recent years and drastically changed the lives of many individuals. However, as cryptocurrencies gain popularity, so do crypto pump-and-dump scams. With erroneous information, these scams are intended to deceive people into believing a crypto investment has high potential, whereas it may not.
After successfully convincing some investors, the fraudster waits until the coin's price skyrockets and eventually sells however much of this coin or token they have acquired. This practice yields them substantial profits, and they then abscond with the money from their victims.
The crypto-pump-and-dump phenomenon has become increasingly common in recent years as cryptocurrencies can be purchased and traded anonymously. It is arguably an easy and "safe" way for criminals to make a career.
Whether you are a professional or even a crypto beginner, you’ve come to the right place. This article discusses how to prevent crypto pump-and-dump schemes and invest in crypto projects with higher upside potential. It covers how these scams work and how to recognize and prevent them. Without further ado, let’s dive in!
Defining Crypto Pumps and Dumps: What You Need to Know
In simple words, crypto pump-and-dump schemes are a type of fraud that involves artificially inflating the price of a cryptocurrency through false and misleading statements. The goal is to create a buying frenzy among investors who are unaware of the true value of the asset. Once the price has been pumped up, the fraudsters sell their holdings at a profit, leaving other investors with worthless coins.
5 Ways to Recognize Crypto Pumps and Dumps
- Rapid Price Surges Followed by Crashes
- Unusually High Trading Volume
- Coordinated Social Media Hype
- Unknown or Low-Volume Tokens
- Fake News and FOMO Tactics
Rapid Price Surges Followed by Crashes
If you see a cryptocurrency whose price is rapidly surging, be wary of investing in it, as it may be a pump-and-dump scheme. Rapid price surges are always followed by crashes, which is one of the most common signs of this cryptocurrency scam. The price of a cryptocurrency may suddenly skyrocket, only to plummet just as quickly.
Unusually High Trading Volume
Trading volume in crypto is the total value of digital assets traded over a specific time period. It is a measure of the activity of a coin in the market or on an exchange. If you notice that the trading volume of a particular coin or token is unusually high, be aware that this could be a warning sign. A group of traders, or whales," may be manipulating the market for their own benefit.
Coordinated Social Media Hype
If you’ve been relatively active in the crypto space, you will know that fraudsters often use social media platforms like X (formerly Twitter) to create buzz around a particular cryptocurrency, encouraging investors to buy in before the price spikes. Meanwhile, most of these social media and discussion groups often employ copy-and-paste messages to create hype around a specific token and suddenly disappear when the token has been pumped.
Unknown or Low-Volume Tokens
Another effective way to recognize crypto pumps and dumps is to look for sudden and significant price increases in unknown or low-volume tokens. This is due to the fact that pump-and-dump scammers frequently target these tokens because they are less likely to be recognized by regulators or expert investors.
When a pump-and-dump scheme is underway, the scammers will typically buy a large amount of an unknown or low-volume token. Then, in order to spark a buying frenzy, they will disseminate false or misleading information about the project. This will cause the price of the token to rise sharply initially.
When the price of the token reaches a certain level, however, the scammers will sell their shares and profit, causing the price of the token to crash and leaving the unsuspecting investors who bought into the token holding the bag.
Fake News and FOMO Tactics
Scammers often spread false or deceptive information about cryptocurrencies to create hype, such as news about partnerships, endorsements, or upcoming technological breakthroughs. They use this hype to create a sense of FOMO (fear of missing out), which can drive investors to make irrational decisions. These people then use this FOMO to convince investors to buy into a cryptocurrency before it's too late, and then they sell off their own shares at a profit.
7 Ways to Avoid Crypto Pump and Dump in the First Place
To protect yourself from cryptocurrency pump-and-dump scams and make wise investment choices, it's important to conduct thorough research and due diligence on any cryptocurrencies you're considering investing in. The following suggestions can assist you in achieving this goal:
- Carefully analyze whitepapers and project details
- Be wary of anonymous sources
- Ensure team credibility and relevant experience in the industry
- The token should have adequate market capitalization and trading volume
- Verify the authenticity of community involvement and following.
- Don’t fall for FOMO and FUDs (Fear, Uncertainty, and Doubt)
- Use a stop-loss order when necessary
Closing Thoughts
Crypto pump-and-dump schemes are a real threat to crypto investors and the entire DeFi industry, but there are steps that you can take to protect yourself. By following the tips in this article, you can increase your chances of avoiding these scams and keeping your hard-earned money safe.
Overall, each crypto pump-and-dump scheme adheres to the same fundamental structure. They create a token, and in order to increase its value as much as possible, they post about it on social media, share memes, and invite users to their social media channels. Therefore, it’s always best to do some digging before making a purchase.
Risk warning: Cryptocurrency investment or trading is subject to high market risk. Hence, you might lose your money in the process. Please do adequate research and plan your investments cautiously. We at MelegaSwap will always make the best efforts to list high-quality and potential coins, but we will not be responsible for your losses.
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