What Is Pump And Dump In Crypto? How To Not Fall For The Trap In 2022

What Is Pump And Dump In Crypto

Digital assets are all the rage these days, and it’s no surprise that they attract their fair share of scams.

While Bitcoin and Ethereum have been around for some time and regulations are underway for these, most new altcoins are largely unregulated. Creating a new altcoin is pretty easy with just a little knowledge of coding and blockchain technology. This ease of access in creating new altcoins draws the attention of scammers.

One such scam based mainly on new altcoins is the pump-and-dump scam (also known as rug pulls) of crypto. Pump-and-dump scams misguide investors in buying digital assets with artificially inflated values. These schemes captured $2.1 billion of investors’ money in 2021, accounting for 37% of all crypto scams.

Whether you are a seasoned crypto investor or are new to cryptocurrency, learning about these schemes might be the best thing you can do to avoid becoming a victim.

Let’s learn more about what these schemes are and how they work.

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What is a Pump and Dump Scam?

In a pump and dump scam, a group of people buy the altcoin when its price is low and then spread positive news about the asset to inflate the price. This scam largely depends on the use of social media and influencers. These scammers hire celebrities to endorse their altcoins. Once the followers start buying in, the price of the digital currency increases. The scammers then sell their digital assets and leave the investors with worthless cryptocurrency.

Fortunately, spotting a pump and dump scam is very easy once you learn the signs. First, it is essential for investors never to buy cryptocurrencies relying only on celebrity endorsements on social media, and always invest in currencies that have been around for a while, like Bitcoin or Ethereum.

How to Avoid Pump and Dump Scams

Pump-and-dump scams are not new for investors as these were very common in security exchanges in the past. Now, with proper regulations in place, it has become almost impossible to orchestrate such scams in the securities market. But due to a lack of regulations, the crypto market is still vulnerable.

It’s easy to spot pump-and-dump scams, but it requires some knowledge about the signs of the scam. Fortunately, this article enlists the steps you can follow to avoid a crypto pump and dump scam.

1.   Educate Yourself

Knowledge is probably one of the most important tools in avoiding crypto scams. Having information regarding the history and purpose of a new cryptocurrency making headlines on social media can help you avoid becoming a victim. Before you invest in any altcoin, make sure to read its white paper. A white paper would include the necessary information, such as why this altcoin was formed, who the owner is, what the purpose of this asset is, and the cost involved in creating it.

The pump and dump schemes are done mainly by the owners of the new cryptocurrency itself. Having an unknown owner is a red flag for investors. A quick search about the owner on Google can prevent you from a potential scam.

Similarly, the history of the altcoin can also tell you if it is a good investment or not. Altcoins that are newly formed and have already started making headlines on social media can signify a pump-and-dump scam.

It is always better to invest in stable cryptocurrencies that have been in the market for quite some time. However, if a cryptocurrency has been in the market for a long time, but its development is still questionable, it might also be a scam. Sticking to Bitcoin and Ethereum might be best for new crypto investors.

So, don’t rush to get in the next time you see your favorite celebrity or social media influencer endorsing a digital asset. Instead, do your research on the cryptocurrency and the owner. This small step will only take a few minutes of your time but will save you hundreds or even thousands of dollars.

2.   Always Start Small

Investing in cryptocurrencies is risky, even if the altcoin has been trading in the market for a long time. To ensure that you don’t fall for scams, it is best to invest in small numbers. For instance, you can start by investing only $10-$20 and gradually increase your investment. Investing $10 or $20 means you won’t break the bank even if you run into a scam, and you can always increase your assets in the future.

3.   Always Buy from Reputed Crypto Exchanges

One way to ensure you keep away scammers’ reach is by buying cryptocurrencies only from reputed crypto exchanges. Some of the bigger crypto exchanges, such as Coinbase, Crypto.com, and Binance are regulated and the altcoins listed on these crypto exchanges have gone through rigorous checking.

Most pump-and-dump cryptocurrencies don’t pass the strict listing requirements of these renowned crypto exchanges and end up with rejections. So, it is always better to buy from a renowned crypto exchange if you are looking to invest in the crypto market.

4.   Be Wary of Celebrity Promotions

Most of the scammers in a pump-and-dump scheme space rely on social media promotions of their altcoins. They pay celebrities and social media influencers to spread positive news about their digital asset. In most cases, scammers use celebrities and social media influencers who do not financially savvy. So, it is a red flag when you see a fashion model or a travel blogger having no understanding of finance and investment promoting a cryptocurrency.

It is the responsibility of the investors to be wary of these celebrity promotions and not rush in to buy the endorsed altcoins. Instead, do your research and find out if the cryptocurrency seems legit or not.

Conclusion

The rising popularity of cryptocurrencies has gained the attention of scammers all over the world. The largely unregulated crypto market is still in its early stages of development, and scammers have already cost investors millions of dollars. One popular cryptocurrency scam of 2021 is the pump-and-dump of crypto.

It is an orchestrated scam of spreading fake positive news about a digital asset resulting in the artificial inflation of its price. When the price is inflated to its highest, the scammers then sell their altcoins and leave the investors hanging with worthless crypto.

There are several ways to protect yourself from these scams, such as researching crypto history, reading its white paper, buying from reputable crypto exchanges, and starting with a little investment.

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