How to identify and avoid a crypto pump-and-dump scheme?
Educating oneself about the crypto ecosystem is crucial for investors to pursue during a bear market while awaiting a bull cycle. That being said, having a good understanding of crypto investment entails keeping an eye out for fraudulent projects that threaten to drain assets overnight, a.k.a. pump-and-dump schemes.
Pump-and-dump in crypto is an orchestrated fraud that involves misleading investors into purchasing artificially inflated tokens — typically marketed and hyped by paying celebrities and social influencers. 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 the investors have purchased tokens at inflated prices, the people owning the biggest pile of tokens sell out, resulting in an immediate crash in the token’s prices. While fraudsters disguise pump-and-dump schemes under the pretext of creating the next batch of crypto millionaires, knowledgable 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 — solving real-world use cases, guaranteed exorbitant returns and unwithered backing from celebrities and influencers.
The long-term success of a cryptocurrency is heavily dependent on the use cases it serves. As a result, people supporting pump-and-dump projects often suffice their involvement by highlighting the use cases the token aims to serve. In addition, such schemes typically rope in celebrities by upfront payments in cash and the project’s in-house tokens.
Celebrities then market the fraudulent tokens to trusting fans, usually with promises of high investment returns. In the case of SafeMoon, celebrities were accused of a slow rug pull, implying a slow sell-off of holdings as the trading volume from retail investors remained inflated.
Binance, the biggest crypto exchange in terms of trading volume, also warned investors from taking investment advice from celebrities and influencers.
Superstars ≠ crypto experts.
Music artist @JBALVIN says “do your own research”.
Learn more ⬇️https://t.co/3rC7r0uJ8M pic.twitter.com/Hml8AN2aEs
— Binance (@binance) February 7, 2022
In the next bull cycle, traditional and crypto investors across the globe will amp up efforts to recoup losses from the ongoing bear market. Knowing this information, fraudsters will try and find opportunities to dupe unwary investors by presenting unrealistic gains. As a result, do your own research (DYOR) stands as one of the best pieces of advice in crypto.
Related: Sygnia CEO criticizes Elon Musk for alleged Bitcoin pump and dump
Elon Musk was recently accused of manipulating crypto prices by prominent South African billionaire businesswoman Magda Wierzycka.
Wierzycka believes that Musk’s social media activity and its implications on the price of Bitcoin (BTC) should have made him the subject of an investigation by the U.S. Securities and Exchange Commission. She believes that Musk knowingly pumped up the price of Bitcoin via tweets, including those mentioning Tesla’s $1.5 billion BTC purchase, then “sold a big part of his exposure at the peak.”