Ms. Sherly has just stepped into the crypto trading arena and likes to call herself a crypto enthusiast. During the day, she is a full-blown writer and part-time crypto trader. At night, Ms. Sherly likes to listen to her favorite musician to sleep. The next day on Twitter and other social media handles, she saw her favorite musician promoting a new cryptocurrency that was being heavily promoted and had caught her eye too.
Ms. Sherly decided to invest in the specific crypto as the returns were lucrative, and it was her favorite musician’s choice. To her exhilaration, the prices skyrocketed; she was proud of the investment she had made. But a few days passed, and the prices slumped tremendously. She had lost all her money!
What had actually happened here was that while the hype caused innocent investors to buy the tokens, the founders massively sold off the tokens at their peak prices and ran off, leaving the other investors in a deep valley. One may say, Ms Sherly was duped under the notorious crypto pump and dump scheme.
The crypto pump and dump scheme is becoming a common crypto scam, given the popularity of digital assets and the lack of awareness around cryptocurrencies and the security mechanisms in place.
The Pump and Dump Mechanism:
There is a simple mechanism behind the scheme that happens in three phases; namely:
- Promotion Phase
- Pump Phase
- Dump Phase
Scammers introduce the cryptocurrency into the market and create hype around it. Social media influencers, famous personalities, or ad circulation attracts investors. The scammers promise lucrative returns in a short time and disguise the scam as a promising investment.
By listing in exchanges, a wider and broader range of investors are attracted to crypto. After increasing the craze around the crypto, the price starts pumping up in the market, and the scammers find the right time when the price is at the peak to dump the naive investors.
Other methods through which the scam can be carried out is by inviting investors through emails, fake news, calls, spam, and posting messages online claiming to have inside knowledge about the crypto.
Hence, artificial inflation by falsely projecting the crypto project as worthy and exaggerating and misleading promotion of the crypto leads to investors investing in the scam and losing their money. Unlike other scams that are focused on a specific target mass of investors, these scams try to pull in as many investors as possible. But can the investors be saved from being tricked?
How can Crypto Pump and Dump Scheme be Avoided?
Look out for the founders
Normally, the fraudulent digital assets being marketed have an anonymous founder, and there is a reason behind it. Anonymity will leave no trail behind the scammers, and they can carry out the fraud easily. However, certain cryptocurrencies with less value may have a known founder and still be used for scamming purposes.
Research
One very important tool while investing in the crypto market that all investors should be aware of is research. Educate yourself properly about a cryptocurrency that’s the hot topic before jumping into the crowd and losing valuable money. As explained earlier, the popularity of cryptocurrency can be artificially created and can be misleading. Research, investigate and study before planning your investments to avoid falling into such schemes.
Diversify and Distribute
Instead of putting your whole wad of cash into the seller’s bag, play safe. Invest in little amounts to gauge the movement of the price in the market and how other things play out. Even in the end, if you get caught under a fraudulent scheme, at least you didn’t empty your whole bank account.
Be wary of too many celebrity promotions or giveaway schemes
Celebrities are given incentives for the promotion of digital assets; this does not mean they have done their market research and are themselves investing in cryptocurrencies. Sometimes scammers can disguise themselves as trusted influencers and directly contact you and invite you to invest. If that’s the case, too, don’t forget to research properly.
While these rug pull scams or crypto pump and dump schemes are avoidable if little caution is taken, Investors may lose their interest, looking at the daunting side of the crypto market that offers no safety for their investments and fails to follow any regulations. No good comes without its due share of bad. Crypto markets, just like any other market, witness frauds and scams. The ways to avoid the scam are not absolute but can give an idea of how to look out for fraudulent schemes and invest only after thoroughly studying your potential investment. Always remember that if something seems too good to be true in the financial world, it’s a clear-cut warning.
