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As interest in cryptocurrencies grows, so does fraud. Generally, the market sees low trading volumes on most days with occasional spikes in price and volume. But are these price spikes genuine or are they the result of pump and dump schemes? In this article, we discuss what cryptocurrency pump and dump schemes are, how they impact the market, and what signs you should look out for.
A pump and dump scheme refers to a group of people artificially inflating the price of an asset through false and misleading information. In essence, they will buy an asset for a low price all at once, prompting the price to rise. This sudden and rampant increase in an assets nominal value will prompt unknowing traders to jump in and purchase the asset as they hope to ride a bull market. The original buyers then sell (dump) the assets to make a quick profit. This shift in supply and demand often causes many users to make a significant loss.
A group of core organisers is at the heart of all pump and dump schemes. They are responsible for recruiting other people. Pump-and-dump schemes are often advertised on social media and messaging platforms such as Telegram.
Pump and dumpers choose a coin and an exchange to target. The aim is to drive up the volume of the selected coin. In an ideal target, the volume will be low, allowing schemers to lock up as much liquidity as possible. As a result, the schemers can determine the price when selling their newly acquired coins.
While pump and dump schemes may seem like lucrative opportunities, it is generally the core organizers who make the most money. Their job is to predict when the pumps will take place. The tip will be tier-based and based on the rank of everyone else involved. Especially if you are at the bottom of the rankings, you will lose money.
Pump-and-dump schemes are typically advertised in an obvious way. Typically, social media ads promise instant profits to promote the event. If it seems too good to be true, it probably is.
Bitcoin surged to a record high in 2017 after first becoming mainstream. A lot of people felt left out as a result. Known as ‘FOMO’ – the fear of missing out or the fear of missing out on opportunities. Typically, pumps and dumps will provide a compelling reason for the event and entice individuals who fear missing out.
You can avoid pump and dump schemes by not giving in to feelings of FOMO. Make investment decisions based on market research and understanding of current trends. Following the latest news will allow you to stay on top of the market and spot potential pump and dump schemes.
The following warning signs indicate a pump-and-dump scheme is likely:
Chalmers, R. (2019, May 8). The real consequences of cryptocurrency market manipulation. Coin Rivet. https://coinrivet.com/the-real-consequences-of-cryptocurrency-market-manipulation/
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