Crypto scams are triggered by fraudulent business practices in the cryptocurrency space that take advantage of the decentralized nature of cryptocurrencies to trick users and investors. These tactics include phishing attacks, fraudulent exchanges, phony initial coin offerings (ICOs), and Ponzi schemes. Pump and dump schemes are one of these crypto scams that have become rather common, and are therefore crucial to be aware of.
Pump and dump strategies are used to inflate the price of crypto artificially through market manipulation. Needless to add, these are illegal and compromise the integrity of financial markets. Let’s understand their underlying mechanisms and types before we learn how to protect ourselves from them.
How do pump and dump schemes work?
These crypto scams through market manipulation entail “pumping” up the perceived value of an asset by spreading false or exaggerated information, frequently done through press releases, social media, and internet forums. The orchestrators quickly “dump” their holdings at the inflated value after inflating the price artificially, leaving gullible investors with overpriced assets that eventually lose value.
Types of pump and dump schemes
Various crafty strategies are employed to cause market manipulation for pump and dump schemes. These crypto scams, from disseminating misleading information and concerted buying to exploiting social media trends, are designed to leave investors with large losses. Let us take a take a look at the various types of crypto pump and dump:
Classic pump and dump schemes
These pump and dump schemes entail market manipulations regarding a crypto and the project behind it. To create a false impression of the value of a financial asset, perpetrators spread false or exaggerated information about it, frequently through social media, online forums, or deceptive press releases. Coordinated buying and hijacking of social media trends draws investors into a pump and dump scheme.
Boiler room
A “boiler room” is where multiple tricksters congregate to pursue investments through aggressive telemarketing. The cryptos that are being pushed are usually either extremely overpriced or nonexistent. With the market manipulation, investors are left with worthless or overpriced assets after the scheme’s fraudsters swiftly sell their own holdings at a profit after investors start buying them. Cold calls, pushy sales techniques, and inaccurate or misleading information are frequently used in these crypto scams to trick people into making bad financial decisions.
Crypto influencers pushing shitcoins
Not very different to the boiler room scam, in this case malicious influencers promote ‘shitcoins’ that have no value or utilities for their own gain, and manipulate their followers and the broader crypto community into buying these tokens. It’s important to always do your own research for this very reason instead of blindly following crypto influencers.
“Wrong number” scheme
In this crypto pump and dump, con artists may present themselves as reliable financial guidance providers and will claim they mistakenly called the incorrect number and offer unsolicited investment advice. In reality, they want to instill a false sense that they have insider information so people will rush into buying a certain asset. The “wrong number” pump and dump schemes are a dishonest way to increase demand and spark interest in the targeted asset, which in turn causes artificial price inflation.
How to protect yourself from pump and dump schemes?
It is essential to defend oneself against market manipulation through pump and dump schemes to prevent large financial losses, and here’s how you can do it:
- Do your own research
Before making an investment, thoroughly investigate a crypto and the project behind it to protect yourself from pump and dump schemes.
- Be skeptical of the hype
Remain skeptical of hype surrounding a crypto by assessing information critically. Prioritize reliable news sources and always double-check information. Steer clear of rash decisions based on sensationalized stories and do your homework to distinguish between legitimate investment opportunities and possible pump and dump schemes.
- Monitor and stay informed
Keep an eye out for pump and dump schemes by keeping tabs on market trends and regularly monitoring crypto activity. Make use of dependable sources for financial news, follow official announcements from a crypto project, and use analytical tools to evaluate trading trends. Watch for abrupt, inexplicable price increases and exercise caution when accepting unsolicited investment advice, particularly from unidentified sources.
- Seek professional advice
To improve protection against crypto pump and dump, consult licensed financial advisors for expert guidance. Select respectable experts who have a history of moral behavior. Their knowledge lowers the likelihood of falling for crypto scams as they offer insightful guidance and assistance navigating complicated financial environments.
Some pump and dump scheme examples
The easiest example to help anyone understand pump and dump schemes would be the plot of The Wolf of Wall Street. The protagonist, Jordan Belfort, and his partners actively promoted low-value stocks using misleading information and high-pressure sales techniques to engage in pump and dump schemes. Through coordinated buying, they manipulated stock prices artificially and profitably sold their shares, leaving investors with undervalued stocks.
The Wolf of Wall Street was based on a true incident that occurred during the early 1990s. To sell the cheaply acquired stock at a higher price, Stratton Oakmont, a brokerage for penny stocks, made false and deceptive positive statements that artificially increased the price of owned stock. Jordan Belfort, co-founder of this company, was found guilty of this pump and dump scheme.
Closing statement
Pump and dump schemes are a serious risk to investors as they cause large losses to gullible people. Investors should be skeptical, perform in-depth research, and be wary of unsolicited investment advice in order to protect themselves from such market manipulation tactics.
Follow Millionero to stay aware of the current crypto market trends and avoid being a victim of pump and dump schemes!