Cryptocurrency has made people millionaires overnight. The world of crypto is filled with opportunities, and so it comes with risks. Crypto is a stable digital currency that uses blockchain to record transactions and can be considered the most secure. While a lot of crypto coins are launched and most are genuine, there are a few that are built just to manipulate traders and leave them in losses. Pump and dump is the most common and talked-about scam in the crypto world. We will discuss pump and dump, how it works, and how you can recognise and not be scammed.
What is Pump and Dump?
Pump and dump is a term used to describe a manipulation technique where manipulators create misleading and exaggerated hype to increase demand and thereby surge the price, and then make a profit from it. Pump and dump is common in the crypto world, and seasoned traders and investors are capable of understanding when a token is being artificially pumped. The manipulators who are pumping these are supposedly the early investors and leave with huge profits once they sell off (dumping) all of their investment, which leaves the late investors in heavy losses.
Pump and Dump – How it Works
Let’s look into how these manipulators work and make profits out of the market. There are new crypto tokens released constantly, and it’s hard for beginners to decide which one to invest in.
Here is a step-by-step breakdown of how it’s done:
- Selecting Cryptocoin
There are thousands of cryptocurrencies in the market, and scammers choose the low-value ones that are not traded a lot. It’s a lot easier to buy these tokens in huge quantities, thanks to their low value, and they are much easier to manipulate, since it doesn’t have many active traders speculating.
- Promoting – Pumping
There are thousands of cryptocurrencies in the market, and scammers choose the low-value ones that are not traded a lot. It’s a lot easier to buy these tokens in huge quantities, thanks to their low value, and they are much easier to manipulate, since it doesn’t have many active traders speculating.
- Price Surge
Beginner investors and traders may fall into this trap and start buying in. FOMO, or Fear Of Missing Out, feeds this reason and traps beginners. These investors may not understand the fundamentals and may believe the fake promotions because now that many people are buying in, the price will actually start surging. The rapid climb happens within minutes or hours, and some even last for days.
- Sell-off or Dumping
Once the price surge reaches their target, these manipulators would sell off all their holdings that they bought low. This results in a market crash where the price just drops downhill in a very short period of time. This leaves the ones who bought in late with no time to react and holding on to coins that have lost their value.
Examples of Pump and Dump in Crypto
- SQUID: The squid game token is inspired by the Netflix show, which was hyped, claiming that the token would be required to participate in an online game. Several celebrities were also convicted of being involved in the promotion. The price soared, but investors were restricted from selling off their holdings while the creators sold theirs and walked off with approximately $3 million, after which the website ceased to exist.
- EMAX: This crypto was promoted by celebrities like Kim Kardashian and Floyd Mayweather Jr. The endorsements did surge the price, and the manipulators exited with profits. The celebrities were fined by the government for being a part of the pump-and-dump scheme.
- Coin of the Day: John McAfee is the founder of a prominent antivirus software company. He used his Twitter account, which is followed by many, to post “Coin of the Day” to promote low-volume coins. He and his team would already be holding the coin, and his tweets would result in price surges through which he made profits.
Protect Yourself From Pump and Dump
Greed and FOMO are real; we are psychologically wired to jump on an opportunity when others do. Quick money is always dangerous and risky. Even when thousands are buying and promoting a coin, always do your own research before investing money. If it sounds too good to be true, then it probably is, and so stick to fundamentally established coins. Research on the core team, whitepaper, and project goals instead of following celebrities. When you see sudden spikes in prices, it’s probably market manipulators.
