What is pump-and-dump schemes (and how to avoid them)

What is pump-and-dump schemes (and how to avoid them) 1

If you’ve been keeping up with the crypto market for any length of time, chances are you’d be familiar with the volatile price fluctuations of Bitcoin and other cryptocurrencies. Despite a relatively bull-ish market these past few months, it would appear at the time of writing that crypto prices are once again falling.

To the typical investor, dips and spikes are a relatively normal part of investing in cryptos. As we’ve seen from how fortunes were made overnight during the 2017 crypto rush, massive volatility and insane valuations are par for the course.

The unregulated nature of the crypto market was able to draw in investors and speculators hoping to make a fast buck. Consequently, nearly everyone and their auntie has been jumping on the crypto wagon.

Hardly a week goes by without some upstart announcing a new coin offering or crypto-related service. Even huge corporations like Facebook have begun making plans for their own form of cryptocurrency called Libra.

Unfortunately, all of this market optimism has made it extremely easy for unscrupulous parties to take advantage of this situation. We’ve heard of how numerous crypto exchanges have collapsed overnight leaving many in the lurch and of hack attacks and heists which emptied wallets.

However, it would appear that criminals have become much more advanced. Now, schemes known as pump-and-dumps are becoming increasingly prevalent.

What is a pump-and-dump scheme?

In a nutshell, pump-and-dumps are scams that take advantage of naive investors in order to make a huge profit within a short amount of time. A group of “investors” will get together to artificially raise the price of their coins through a combination of means.

This can be done through buying and holding large volumes of a specific currency in order to increase its value. Then, through word of mouth and social media marketing, false news involving said currency is spread in order to generate hype and interest.

Typically, these coins will be marketed as the next big thing and dozens of investors will be invited to purchase them. Following this, as the price of the coin increases, scammers will dump their holdings for huge amounts of profit to their victims.

This causes the value of the coin to crash and victims are left with nothing in their hands but a pile of useless cryptocurrencies.

For a variety of reasons, pump-and-dumps are illegal in traditional financial markets. Perpetrators of such schemes usually face prison sentences and hefty fines for their crimes. For example, Jordan Belfort aka The Wolf of Wallstreet was imprisoned for running a pump-and-dump scheme through his firm Stratton Oakmont.

Being unregulated, the cryptocurrency market is especially vulnerable to pump-and-dumps. The lack of any governing body and the total absence of legal recourse for victims means that pump-and-dumps are especially endemic here.

How to spot a pump-and-dump?

This doesn’t mean that you should avoid cryptocurrencies like the plague. Far from it. With the future looking bright for crypto, you should instead take steps to protect yourself from falling prey to a pump-and-dump.

Here’s how you can avoid falling victim so such schemes

  1. Don’t involve yourself with it

Forget what you’ve been hearing from so-called experts who claim that you can profit from a pump-and-dump. These scams are intended to only profit a small group of investors who are in on the entire thing.

If you think that you’d be able to ride it to the top, you’ll be sorely mistaken. You’d often have little-to-no idea when prices would fall from under you.

A small miscalculation could cost you dearly. When you spot a pump-and-dump, don’t be tempted to try and capitalize on it. Just move on to something else.

  1. Stick to what you know

The cryptocurrency market has changed drastically since 2017. In the early days, cryptos were treated like digital gold with investors snapping up cryptos hoping to make it big through speculation.

Nowadays, institutional investors and whales can upset market valuations faster than you can sneeze. As the market matures, volatility is expected to decrease as investors opt for cryptos with stable valuations.

Hence stick to what you’re familiar with and invest in cryptos with solid fundamentals. This rule of thumb will stand in good stead and help you avoid pump-and-dumps.

  1. Do your homework

So, you’ve seen what looks like a promising coin on the market and you’re tempted to take the plunge. However, before you go all in, it’s always better to do your homework before jumping in with two feet.

Tell-Tale Signs of a pump-and-dump are a sudden and dramatic increase in interest on social media. Random investors touting how much they’ve made from said coin in just a matter of months.

All of these could be scammers attempting to drum up hype for their coin in an effort to drive up prices. Don’t fall for it and instead reach out to long-term investors; people who’ve been in the market for a while.

Chances are with a simple Google search; you’ll be able to see if a coin/token is worth investing in or not. There are also trustworthy exchange websites, like eToro cryptocurrency trade system, which are regulated and will secure your privacy and your rights as an investor.

Closing Thoughts

While deregulation does have its benefits, it is also a breeding ground for scammers and hustlers looking to benefit from the misery of others. Do your homework, check the fundamentals and you’ll have no issue falling prey to such people.

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By Techniblogic

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