What You Need to Know About Crypto Pump-and-Dump Scams

Crypto pump-and-dump schemes remain prevalent, allowing bad actors to profit through market manipulation. Learn how these scams work, psychology tactics used, major examples, and most importantly – how to identify signs of a pump and dump to avoid being a victim. Protect your crypto investments and wallet by getting informed.

Crypto Pump and Dumps Explained

A "pump and dump" artificially inflates the price of an asset to make a profit. Crypto pump and dump groups organize coordinated buying to hike up prices, generating buzz and FOMO that attracts other buyers. Once demand peaks, the groups sell off their shares for substantial gains.

According to cybersecurity firm Mandiant, cryptocurrency schemes like pump and dumps extracting over $7.7 billion from victims in 2021. Here is how crypto pump and dump scams unfold:

1. The Pump: A group identifies a low market cap cryptocurrency and spreads coordinated hype, misleading news, or false information to drum up interest. This attracts new unknowing investors.
2. The Rally: As new money pours in, prices skyrocket above true value. The hype and fear of missing out (FOMO) perpetuates the buying frenzy.
3. The Dump: Once prices peak, the pump organizers sell their shares, taking profits.
4. The Crash: With no fundamental value, the pumped asset crashes. New buyers are left holding worthless coins at inflated prices.

"Pump and dumps prey on the get rich quick mentality of many new crypto investors," explains Michael Creadon, a cybersecurity expert. "The lure of quick profits blinds people to the manipulation."

Cryptocurrency exchanges with low trading volumes and liquidity are most vulnerable to manipulation. According to a 2021 Wall Street Journal study, Binance and Bittrex saw the most pumps.

Tactics Used to Lure Victims

Pump and dump groups rely on psychological tactics and social engineering to build hype and attract unknowing investors. Some typical tactics include:

• FOMO messaging: Using fear of missing out to convince people to buy in quickly
• False scarcity: Limits on supply or time create perceived scarcity
• Misleading news: Fake PR or news stories promote the asset
• Influencer hype: Paying influencers or promoters to hype the asset
• Doctored images: Showing fake account balances or gains from the asset
• Phony utility: Making false claims about an asset‘s capabilities or potential

These manipulative tactics cultivate mania and hype people into poor investment decisions. "With the volatility of crypto itself, pump and dumps can seem very believable," explains Jane Seymour, a blockchain lawyer. "Investors must stay rational and do their homework before buying."

Major Crypto Pump and Dump Examples

While pump and dumps happen frequently with smaller altcoins, a few major crypto scams stand out:

• Squid Game Token (2021): This scam capitalized on the Netflix show‘s popularity to lure in victims. Creators manipulated the crypto to rocket up 3,000% in weeks. But investors could not sell. The developers dumped their tokens, stealing $3.38 million before disappearing.
• SaveTheKids Token (2021): This scheme involved influencer promotions on social media. False claims about charity partnerships pumped up the price, allowing creators to cash out $350,000.
• DeFi100 (2020): A DAO-like group on Discord pumped obscure DeFi coins. Members bought up tokens before launch and then unloaded them onto regular investors at up to 500% gains.
• Forsage (2020): A pyramid scheme disguised as a trading platform, Forsage manipulated new users to constantly recruit more buyers. Eventually the pyramid collapsed, losing members more than $3 million.

These examples reveal how even savvy crypto traders can be deceived without proper due diligence. "Always verify information with independent research," urges Jane Seymour. "Or you may end up the victim of carefully orchestrated lies."

Warning Signs to Spot a Pump and Dump

Here are key signals that a cryptocurrency scheme may be a pump and dump:

• Sudden unexplained price spikes
• Pressure to buy in fast before missing out
• Promises of guaranteed returns
• Claims of secret insider information
• Little to no details on the project origins and roadmap
• Aggressive shilling and hype on social media
• Associations with influencers promoting the asset

According to cybersecurity experts, investors should apply the "trust but verify" approach. "If something seems too good to be true in crypto, it very likely is," says Michael Creadon.

Protect Your Crypto Investments from Pump and Dumps

The highly volatile cryptocurrency market is a hotbed for pump and dump schemes. Here are key tips to safeguard your coins:

• Stick to major exchanges like Coinbase and Binance with strict listing processes. Avoid trading platforms with low liquidity.
• Research coins thoroughly before investing. Read white papers, check project roadmaps, visit official websites.
• Never invest more than you can afford to lose. Crypto remains highly speculative. Limit exposure to 5% of holdings.
• Be wary of "hot tips" or insider info. Verify using independent sources. Beware pressures to buy in fast.
• Use cold storage like hardware wallets rather than storing large amounts on trading platforms.
• Monitor investments actively. Watch for sudden spikes that signal pumps. Consider setting stop losses.
• Withdraw quickly if you suspect a coin is being pumped. Exit before the eventual crash and burn.

Staying informed on common crypto scams like pump and dumps can help you make smarter trading decisions and identify manipulative tactics. With caution and thorough due diligence, it‘s possible to invest wisely. Don‘t let fear and greed lure you into pump and dump losses.