How to Spot a Pump and Dump Crypto Scheme?

The cryptocurrency market is booming with a lot of new investors jumping in for the chance to make big profits. However, it's important to be aware that there are some not-so-great things happening, too, like pump and dump crypto scams. These scams involve people manipulating the price of a cryptocurrency for their own benefit.

Let's take a look at how these schemes work and how you can avoid getting caught up in them. By understanding the tricks scammers use and knowing what to watch out for, you can feel more confident about navigating the crypto market.

Before we get started, however, it's important to emphasize the importance of using reputable cryptocurrency exchanges. Choosing well-established and trustworthy platforms like Binance, Kraken, or Bybit can help minimize the risk of falling victim to pump and dump schemes.

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What You Need to Know About Crypto Pump and Dump Schemes

Navigating the cryptocurrency market can be challenging, especially with the risk of encountering pump and dump schemes. These scams can result in significant losses if you're not careful. That’s why it's important to understand what is pump and dump crypto scheme and how it works so you can avoid getting caught up in one.

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What is a Pump and Dump Crypto Scheme?

Pump and dump crypto schemes are scams that occur when the price of a cryptocurrency is artificially inflated (pumped) by spreading false or misleading information. Once the price is high, the scammers sell off their holdings for a profit, causing the price to crash (dump) and leaving the victims with heavy losses^[1].

Crypto pumping involves individuals or groups working together to buy large amounts of a cryptocurrency, increasing its price. This price surge attracts other investors who want to take advantage of potential gains. 

However, once the price peaks, the group sells off their coins, causing the price to drop sharply and leaving latecomers with significant losses.

These rapid price swings, sometimes within minutes, can wipe out entire investments, leaving victims feeling helpless and frustrated.

Crypto pump n dump schemes actually derived from the traditional securities market. Usually, scammers target small-cap stocks, inflating their prices through coordinated efforts and selling quickly for a profit.

Similarly, in the crypto space, scammers often target low-cap coins and tokens, exploiting their low trading volumes. They typically use social media and online platforms to generate hype and spread false information about a particular cryptocurrency.

They manipulate discussions on platforms like Telegram, X, Reddit, and Instagram, tricking potential investors into thinking a project is gaining momentum when it’s really not.

How Pump and Dump Crypto Schemes Work?

Pump n dump schemes in the crypto market usually follow a familiar pattern. They involve a coordinated, short-term effort to boost the demand for a specific coin, causing a sudden price spike.

Before we get into the mechanics of these schemes, let's identify the key players. These scams typically involve three main actors:

• Pump Organizers: Individuals or, more commonly, organized groups that use encrypted chat applications to coordinate crypto pumping and dumping events. They benefit from insider information and ultimately profit the most from these schemes.
• Pump Participants: Investors who quickly buy specific coins or tokens after receiving instructions from the pump organizers. This collective action causes the coin's price to be "pumped." Many participants end up purchasing the coin at an already inflated price and become the ultimate victims of the scheme.
• Pump Target Exchange: The exchange chosen by the pump organizers for the crypto pump and dump scheme. Exchanges usually profit by pumping coins acquired before the event at a higher, pumped price. They also earn high transaction fees due to the increased trading volume driven by the scams.

Now that we've examined the fundamentals of pump and dump crypto schemes and the people involved, let's look at how these scams usually work. This normally involves four phases^[2], as follows:

Setting Up

The organizer usually creates a public group or channel and gets as many members or subscribers as possible. To do this, they advertise and share invitation links on popular platforms like X, Reddit, Telegram, or Discord.

Pre-Pumping Announcement

Once enough members have joined, the group is prepared to start crypto pumps. Normally, the organizer will announce the details a few days in advance, including the name of the exchange where the pump will occur and the specific pairing coin to be used.

As the crypto pumping event gets closer, the admins of the group send countdowns and reminders about the rules, which typically include:

• Buy quickly.
• Promote the pumped coin on social media to attract others.
• HODL the coin for at least a few minutes to allow others time to join.
• Sell in smaller portions instead of all at once.
• Only sell at a profit, never below the current price.

The admins also motivate the group by sharing examples of past pump profits to boost confidence and encourage participation.

Pumping Coins

The admins announce the target coin at the scheduled time. Then, they encourage everyone to buy and hold the coin to increase its value. Within the first minute, the coin's price can skyrocket, sometimes multiple times over.

Dumping Coins

The coin's price reaches its peak just a few minutes or even seconds after the crypto pumps start. Even though the admins keep telling the members to buy and hold, the price usually drops.

As soon as the first dip happens, people begin to panic-sell. The price might bounce back briefly as a second wave of buyers jumps in, but it usually falls quickly to its original level or lower.

This price drop usually signals the end of the dump, with most investors opting to hold onto their coins rather than sell at a loss.

How to Spot a Pump and Dump Crypto Scheme?

Now that you understand what is pump and dump crypto scheme and how it works, let's look at how you can spot them. Recognizing the signs of a pump and dump can help you steer clear of these schemes.

How Do You Recognize a Potential Pump and Dump Scheme in a Chart Price Trend?

Essentially, there are two ways to spot crypto pump n dump: by analyzing the price chart trend and observing external factors. So, how do you recognize a potential pump and dump scheme in a chart price trend? 

Spotting these schemes through price charts involves looking for specific patterns and clues. Here are some common characteristics to look for:

Unnatural Surge in Price

A sudden, sharp increase in the price of a cryptocurrency is one of the most apparent signs of a crypto pump. This spike typically isn't backed by any substantial news or developments related to the crypto.

Instead, it’s driven by coordinated buying from the pump organizers and participants. If you see a coin that has jumped dramatically in price without any apparent reason, consider it a red flag and be cautious.

Rapid drops often follow these unnatural price spikes in the price chart. During this dumping phase, retail investors caught up in the hype suffer significant losses as the price quickly falls.

By the time they realize what's happening, it's often too late to sell at a profitable price, leaving them stuck with worthless or significantly devalued tokens.

High Trading Volumes

A sudden price surge isn't the only giveaway. Look for a corresponding explosion in trading volume in the chart price. This surge is usually fueled by the influx of buyers participating in the pump phase.

Once the price reaches its peak, the "dump" phase kicks in. Organizers begin selling their holdings at inflated prices, causing the cryptocurrency's value to drop rapidly.

This selling frenzy triggers another surge in trading volume as anxious investors rush to sell off their assets to minimize losses.

So, keep an eye out for unusual trading volume patterns, especially when it comes to coins with typically low activity. If a price spikes dramatically alongside a significant increase in volume, it might be a pump and dump crypto scheme in the making.

Low Market Capitalization

When analyzing potential pump and dump events, it's essential to consider the market capitalization of a cryptocurrency, which denotes its total value. This metric is crucial for assessing the asset’s stability and susceptibility to manipulation.

Pump and dump schemes often target low-cap cryptocurrencies because their smaller value and trading volume make them easier to manipulate. With fewer investors and lower liquidity, it takes less capital to inflate the price of these coins artificially.

So, exercise caution if you notice a sudden and significant price surge in a low-market capitalization coin. Such spikes could indicate a pump and dump scheme. Always conduct thorough research and remain vigilant to safeguard yourself from potential losses.

How to Spot Potential Pump and Dump Schemes Outside the Price Chart?

We’ve answered the question, “How do you recognize a potential Pump and Dump scheme in a chart price trend?”. Now, let's explore several methods for recognizing these schemes without depending only on charts.

While chart analysis is helpful, it has some limitations. Pump and dump crypto schemes can mimic genuine price fluctuations, especially when fueled by false information. Furthermore, interpreting price charts can be difficult, particularly for those unfamiliar with technical analysis.

To detect potential pump n dump schemes, you must look beyond charts. Here are some alternatives to chart analysis that can help you spot these scams.

Excessive Hype 

Excessive hype and aggressive social media advertising are common tricks used in pump and dump crypto scams. Organizers often create a buzz around a specific cryptocurrency using social media.

They make bold claims about the coin’s potential, promise guaranteed returns, or hint at big news that supposedly boosts its value.

This hype is designed to create a fear of missing out (FOMO) among potential buyers, making them feel like they need to buy in quickly before they miss out on huge gains.

They might also involve influencers or famous personalities to persuade more people to invest. Additionally, they might run coordinated social media campaigns to promote the crypto, giving a false sense of credibility and urgency.

So, be aware of these tactics and maintain a healthy level of skepticism to protect yourself from falling victim to a pumping coin scheme.

Suspicious Social Media Activities

Some pump and dump organizers may turn off comments on their social media posts to avoid negative feedback or questions. This method can be considered a red flag, as legitimate projects typically welcome feedback and engagement.

You might also notice inflated follower counts or disproportionate like / view ratios. If a project's posts have many followers but low engagement, it may indicate artificial activity.

You can also check the accounts interacting with the project's posts to see if they're genuine. It might be worth reconsidering the project if the accounts seem suspicious or your comments are ignored or deleted.

Remember, an active community and responsive development team usually mean a project is healthy. But if you find a project with a quiet community or developers who are hard to reach, it could be a sign of something fishy.

Unverified Claims and Promises

Watch out for unverified claims and promises that guarantee returns. Scammers often use bold statements about a coin's potential to attract investors with the promise of huge profits. 

If something sounds too good to be true, it likely is. Always verify claims with reliable sources and conduct your own research. Legitimate projects typically offer transparency regarding their goals, development progress, and future plans.

If a project lacks clear information or appears secretive about its operations, it might signify a pump and dump crypto scheme. Transparency is vital for establishing trust and credibility.

Project Founder’s Reputation

The reputation of a project’s founders can reveal much about whether a cryptocurrency is trustworthy. Here’s what to consider: 

• Are the founders upfront about who they are and their previous projects?
• Have they ever been involved in scams or controversies?
• Do they have a track record of building successful, legitimate projects?

Typically, if someone has been shady in the past, they might not be trustworthy now. On the other hand, founders with a positive reputation in the crypto community are more likely to lead genuine projects.

By paying attention to a founder's reputation, you can navigate the crypto market more safely. Before considering any investment, always look for transparency, accountability, and a solid track record.

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Essential Tips to Stay Secure

Now that we have familiarized ourselves with the key tricks to spot pump and dump crypto schemes, let's discuss some essential strategies to help you stay secure while navigating the market.

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Conduct Thorough Market Research

A pump and dump crypto scheme is often easy to execute because it relies on spreading false information about the asset's prospects. Scammers generate hype and excitement^[3], making it seem like the cryptocurrency is about to skyrocket in value.

It's vital not to fall victim to these strategies easily. Don't let excitement cloud your judgment; always step back and research thoroughly before investing.

Start by scrutinizing the project's whitepaper, which should offer detailed insights into its goals, technology, and roadmaps. A well-crafted whitepaper can reveal much about the project's legitimacy and potential.

Next, delve into the people behind the project. Investigate their backgrounds, previous projects, and professional track record. A credible team with a history of success bodes well for the project's potential.

Evaluate the cryptocurrency's real-world applications. Does it address a genuine problem or provide a unique solution? Projects with practical applications and clear use cases tend to fare better in the long run.

Avoid making investment decisions based solely on social media buzz or anonymous sources. While social media can offer valuable insights, it can also propagate misinformation and hype. Rely on credible sources and verified information to guide your investment choices.

By conducting comprehensive market research, you can shield yourself from pump and dump crypto schemes and make more informed investment decisions.

Avoid FOMO

FOMO is a common tactic in pumping coins. Scammers create a sense of urgency and excitement, making you feel like you have to act fast to avoid missing out on huge profits.

While cryptocurrencies offer many opportunities, it's not a get-rich-quick scheme. Set realistic investment goals and stick to them. 

Remember, overnight success stories are rare, and responsible investing requires a long-term perspective. Don't let promises of instant wealth cloud your judgment!

You must also be cautious of sudden price spikes that can trigger your FOMO. Research the cause of the increase. Is it driven by real-world developments or just social media hype? 

A pump and dump scheme often lacks genuine justification for the price jump. Take a step back, breathe deeply, and separate real excitement from manufactured hype before making any financial decisions.

Use Trusted Cryptocurrency Exchanges

Choosing the right cryptocurrency exchange is crucial in avoiding pump and dump crypto schemes. Leading exchanges typically work with regulatory bodies to develop clear guidelines for the market, significantly lowering the risk of encountering fraudulent activity.

It is wise to select reputable platforms like Binance, Kraken, or Bybit. These exchanges have earned a solid reputation in the crypto community for their security measures, transparency, and regulatory compliance.

On the flip side, new and unregulated exchanges often lack essential security measures and regulatory oversight, increasing the risk associated with trading. Your funds are vulnerable to hacking and other malicious activities without robust security protocols.

Maintain a Level of Skepticism

Keeping a healthy level of skepticism can help protect you from crypto pumps and dumps. If you see a sudden, unexplained price spike, take a moment to question it.

Check if there’s any real news or development behind the increase. It could be a sign of a crypto pumping scheme if there isn't.

Be wary of overly optimistic claims and promises of guaranteed returns! Scammers like using these tricks to lure in unsuspecting investors. Understand that all investments come with risks; no legitimate investment can guarantee 100% returns.

When an opportunity seems unrealistically promising, take a step back. It's always safer to be cautious and avoid overly risky investments. Remember, substantial losses are far worse than missing out on a potential gain.

Examples of Pump and Dump Crypto Scams

Now that you know how to spot pump and dump crypto schemes and the essential tips to stay secure, let’s look at some real-life cautionary examples. These cases can help solidify your understanding of these schemes and their impact.

Save the Kids Token

One of the most notorious pump and dump crypto scams in recent history is the Save the Kids token. Marketed as a charitable initiative to help children, this token gained significant attention back in 2021.

Before its launch, prominent influencers with millions of followers promoted it as a charity-focused cryptocurrency project, promising to donate some of the proceeds to children's charities. 

As a result, the project generated substantial interest and excitement. It led to a surge in the token’s price as many people rushed to buy it, believing in its charitable mission.

The token, with the ticker KIDS, launched on June 5, 2021. At first, its value shot up thanks to the influencer hype. Soon after, it crashed by 60% when large holders sold off their shares for a profit.

The sudden crash led to outrage and claims of a crypto pumping scheme. It turned out that some influencers sold their tokens shortly after promoting them. As a result, many investors were left with worthless tokens and suffered significant financial losses.

The Save the Kids website was closed shortly, and numerous influencers removed their tweets related to the event.

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Squid Game Token

Another notorious example is the Squid Game token scam from 2021. Riding on the massive popularity of the Netflix series "Squid Game," the token was marketed as a play-to-earn cryptocurrency, letting holders join an online game inspired by the show.

The token quickly grabbed attention, and its value skyrocketed. At its peak, the price soared to over $2,800, drawing in many investors looking to cash in on the hype.

But the excitement didn't last long. The token’s value nosedived when the developers sold off their holdings, causing its price to crash to nearly zero within minutes.

When the scam was exposed, the developers vanished with millions of dollars, and the project's website and social media accounts disappeared, leaving no trace behind.

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Conclusions

The crypto market can be thrilling and full of opportunities, but it also comes with significant risks. Pump and dump crypto schemes can leave you at a loss, making learning how to identify them crucial.

Always be wary of sudden price spikes and unusual trading volumes, especially with low market cap coins. Genuine projects have clear goals and engaged communities, not just flashy marketing.

Also, be sure to conduct comprehensive research on any project. Delve into the team behind it and thoroughly review the whitepaper. Responsible investing and maintaining a healthy level of skepticism are crucial safeguards for your investments.

Finally, choosing a secure and reputable crypto exchange platform like Binance, Bybit, or Kraken also adds an extra layer of protection against scams. By taking these precautions, you can confidently navigate the crypto space and boost your chances of success.

The content published on this website is not aimed to give any kind of financial, investment, trading, or any other form of advice. BitDegree.org does not endorse or suggest you to buy, sell or hold any kind of cryptocurrency. Before making financial investment decisions, do consult your financial advisor.

Scientific References

1. J. Kamps, B. Kleinberg: 'To the moon: defining and detecting cryptocurrency pump-and-dumps';

2. J. Xu, B. Livshits: 'The anatomy of a cryptocurrency pump and dump scheme';

3. D. Nam, D. B. Skillicorn: ‘Detecting pump & dump stock market manipulation from online forums'.