While the cryptocurrency market is entering another bull phase, investors need to be aware of the rife crypto ‘pump and dump’ schemes and know how to identify these schemes when they see one. Crypto enters its next bull run, investors and traders should also know that cryptocurrencies with low market caps and trading volumes are vulnerable to these pump and dump schemes.
What is a Pump and Dump Scheme
It is a type of security fraud that focuses on the equity of markets, especially small-cap stocks. In equity markets, this scheme occurs when small groups of investors buy shares in a company with a low market cap, which results in an initial jump in price.
We also have boiler rooms linked to call center operations. Here, they call potential private investors to convince them to buy the stock by giving false information. They claim that the stock is about to experience significant gains. Once a good number of investors have agreed, and its price has risen enough, the initial group of investors will sell their holdings to make a profit. Then, the price crashes, and every other investor makes enormous losses.
Although there is a slight change in the method of operations, pump and dump schemes are still prevailing in the altcoin market due to its unstable nature. These schemes go for digital tokens with low trading volumes. For boiler rooms, the price pumps occur by disseminating false information about a coin on social media.
Furthermore, pump and dump group members communicate via Telegram because it is an encrypted messaging service with thousands of members. How it works: A potential pump and dump coin will be announced in the group chat. Then the real sponsor of the scam will buy the coin. After a few minutes, group members will buy and then spread false information about the currency on social media, blogs, and even news outlets via paid sponsorship. Once there is a hike in price, the scam sponsors and some group members will sell their coins. Then they will all discard the messaging group leaving investors who bought after the price surge to their losses.
Identifying a Pump and Dump Scheme
One of the easiest ways to recognize a pump and dump scheme is when an unknown coin suddenly rises significantly without a solid reason. Another way to recognize one is when you see sponsored news articles about a small-cap coin on social media, especially Twitter and Facebook. That is a sign of a potential pump and dump scheme.
CFTC and Whistleblowers
To help reduce these schemes in the crypto markets, the U.S Commodity Futures Trading Commission is willing to offer financial rewards to whistleblowers involved in such pump and dump groups. Following their resolve, the CFTC published a statement warning investors of the crypto pump and dump schemes. The Commission also advised customers to avoid buying digital currencies based on social media tips or sudden price spikes. In addition, the Commission is willing to give a monetary award to anyone with useful information about these schemes.
How to protect yourself from Pump and Dump schemes
Since these schemes target coins with low trading volume and market cap, you should avoid liquid cryptocurrencies. With that, your chances of becoming a victim will reduce. Also, be wary of following investment advice on social media. Pay attention to charts; if a chart says a pump is close, avoid the coin except you are sure of its potential future value.
Finally, verify your source of information and research. Independent research is useful for making investment choices. In other cases, Reddit is a good source, or you join the LightBlocks Telegram group to get detailed answers to your questions.