What is pump and dump?
Pump-and-dump schemes refer to an illegal manipulation technique when an asset’s price is pumped up intentionally by spreading misleading information. When the price has risen substantially, the manipulator dumps their shares on the market, causing a significant price drop and leaving other investors holding assets worth much less.
Pump-and-dump schemes usually target small, barely known assets as their price can be influenced more easily due to lower trading volume. Also, pump-and-dump schemes prefer assets with lower regulation requirements, such as over-the-counter (OTC) stocks or cryptos. Barely known crypto tokens or projects promoted by influencers are most often super risky and end up with huge swings in their prices.
The regulation around this kind of promotion is a grey zone, and customers should be wary as the associated risks – like extreme volatility – are not highlighted in most cases. Also, in our experience many retail customers rely on information from social platforms, and many newcomer brokers have started providing social features like tweeting or liking on their trading platform, where customers can interact with each other.
Crypto pump and dump
How to avoid crypto scams
Here are BrokerChooser's tips for avoiding scams:
Be critical about what you see online. Social media can be misleading, so it is important that you do your research and verify the legitimacy of the investment yourself.
Don't rush, don’t let FOMO lead you
There can be huge pressure in the crypto community to jump on opportunities as quickly as possible, but you should always take your time to do research. Never feel obligated to invest in something just because it's what everyone else is doing. If all of a sudden an influential person starts hyping up a new token, caution is advised as there is a good chance it might be a scam.
Do your homework and check as many details as possible
Learn to spot the red flags of investment fraud. Make sure you are watching the market, get clued up on the information that is being put out there and validate it through several different sources, such as a whitepaper or a website of the new crypto project. Lack of a website or whitepaper are red flags.
It’s also worth checking the market cap of a crypto project, to see if it increases steadily or rapidly. Rapid jumps can also be warning signs. If you are able to dig into technical details, you can find information on chain explorers, like the volume on that chain.
Crypto pump and dump
Where to look for more
Where to look for more?
Want to know more about crypto? Check out these articles to deepen your knowledge:
- What is a cryptocurrency and how does it work?