How to identify and avoid a crypto-pump-and-dump scheme?

by · July 16, 2022

Educating about the crypto ecosystem is crucial for investors to pursue during a bear market while waiting for a bull cycle. That said, having a good understanding of cryptocurrencies means keeping an eye on fraudulent projects that threaten to empty assets overnight, also known as pump-and-dump schemes.

Pump-and-dump in crypto is an orchestrated scam that involves misleading investors into buying artificially inflated tokens – usually marketed and hyped by paying celebrities and social influencers. The SafeMoon token is one of the most prominent examples of an alleged pump-and-dump scheme involving A-list celebrities, including Nick Carter, Soulja Boy, Lil Yachty and YouTubers Jake Paul and Ben Phillips.

Once investors have bought tokens at high prices, those who own the largest pile of tokens sell out, resulting in an immediate crash in token prices. While fraudsters hide pump-and-dump schemes under the pretext of creating the next group of cryptomillionaires, savvy investors have the upper hand in identifying and avoiding their involvement.

Pump-and-dump schemes are usually accompanied by false promises around three broad categories – loose real-world utility cases, guaranteed exorbitant returns and unwavering support from celebrities and influencers.

The long-term success of a cryptocurrency is highly dependent on the uses it serves. As a result, people who support pump-and-dump projects are often enough to get involved by highlighting the uses the token aims to serve. In addition, such schemes are typical of celebrities by prepayments in cash and the project’s internal tokens.

Celebrities then market the fake symbols to trusted fans, usually with promises of high return on investment. In the case of SafeMoon, celebrities were accused of a slow carpet pull, suggesting a slow sale of holdings as retail investors’ trading volume remained inflated.

Binance, the largest trading platform in terms of trading volume, also warned investors against taking investment advice from celebrities and influencers.

In the next bull cycle, traditional and crypto investors around the world will step up their efforts to recover losses from the ongoing bear market. Knowing this information, fraudsters will try to find opportunities to deceive careless investors by presenting unrealistic gains. As a result, doing your own research (DYOR) stands as one of the best advice within crypto.

Related: Sygnia CEO Elon Musk criticizes alleged Bitcoin pump and dump

Elon Musk was recently accused of manipulating cryptocurrencies by prominent South African billionaire businesswoman Magda Wierzycka.

Wierzycka believes that Musk’s social media activity and its implications for the price of Bitcoin (BTC) should have made him the subject of an investigation by the US Securities and Exchange Commission. She believes that Musk deliberately pumped up the price of Bitcoin via tweets, including those mentioning Tesla’s purchase of $ 1.5 billion BTC, and then “sold a large portion of the exposure at the top.”