How to define a Pump and Dump scheme

Global cryptocurrency markets are gaining momentum, and are attracting more and more investors. While there are many legitimate opportunities in the sector, the lack of regulation in many countries opens the door to market abuses such as the nefarious Pump and Dump scheme – pumping and dumping crypto-currencies.

Crypto Pump and Dump Schemes: Anatomy of the Scam

Many investors want to use smaller tokens, as they dream of getting rich, and after that talk about the huge profits made through early entry. Of course, some of these stories will be true, as sometimes a small token can make a big profit. But a lot of them are just bluffing. Behind this is Pump and Dump.

  • Crypto pump and dump schemes have left many in the mud.

The pump and dump scheme is not new, as it has long been widely used in stock markets. The idea of this scam is very simple. A person or group buys a large amount of securities or tokens that are little traded (this aspect is very important), and thereby provoke a rise in the price.

As the initial purchase causes the price to rise, the entity behind the purchase begins to promote the asset, usually in informal media. As more people buy it, the price will rise and people will be encouraged by the prospect of further benefits.

The company, which was behind the initial purchase and advertising, is now poised to cash out its assets at a much higher price level and record some big profits. Anyone who came to the market at the end of the cycle will be stuck with the asset and there will be no more buyers, which is the end of the scheme.

In general, once the original buyer who started the scheme ceases to exist, the markets and the advertising campaign weaken, prices will fall and anyone who owns shares or tokens will incur big losses. This is briefly and there is a pump and reset scheme.

In fact, these schemes are more than that, and anyone dealing with low-cost, poorly traded assets should know what to look out for when buying during a rally or hot new investment theses.

What to buy and what to avoid

When an investor trades on the small side of cryptocurrency markets, there are some things that are very important to remember about. As we know, the lack of rules and the global nature of cryptocurrency markets make them an ideal destination for attackers using pumping and reset schemes, and there are several consequences for scammers, who know how to take advantage of greedy traders who do not think about strategy.

  • Information moves fast

In times of stock pumping and dumping schemes, the people behind the fraud used call centres to sell shares to private investors, often using incomplete or misleading information for sales. With this setup, it was relatively difficult to contact potential victims compared to the Internet age.

Today to spread information that supports scammers using the pump and dump model to make money has become much easier. In addition to portals such as Reddit and Medium, there are platforms such as Twitter and Telegram that help spread false information quickly.

  • Lying is easy

Another factor to consider is the fact that although many sharemarket based schemes used questionable information to make a sale, the outright lie was relatively rare. There’s a good reason for that.

Most brokers who sold worthless shares were actually registered brokers, and lying could have cost them a license as well as having other legal consequences.

In the crypto sphere, completely false information is used in pampa and reset schemes as people involved in fraud are not subject to any rules and regulators are just starting to prosecute people who act in bad faith.

Obviously, international fraudulent operations are still very difficult to control as criminals know where they won’t be prosecuted for online fraud.

  • Do a study, take your time

The biggest challenges many retail investors face are emotions and the desire to make a big profit quickly. It is these motives that the pump and dump scheme operator uses, and it is hard not to place some responsibility on the victim himself.

Keep in mind that professional financial managers would be thrilled to make 20% annual profits, which should help any investor who goes to every deal hoping to double their capital, realize how unrealistic such expectations are.

Anyone who wants to invest in small tokens that are not widely traded should be well versed in research and know what the company or platform is doing before the tokens are bought. Investors wanting to buy a token that has just gone up 50%, and of which they have just learned about, should take some time to explore it deeper.

Here are a few things to consider before buying a token, never since, suddenly started to rise in price.

Where does the investment thesis come from?

Before you put capital at risk, it is very important to analyze the investment thesis that is driving distribution and subject it to some scrutiny. For example, if the thesis looks like: the token is in price, and I just received a message in the Telegram group – further analysis is needed.

On popular platforms it is very easy to share absolutely false information, and increasing the price of a small token is easy to manipulate. Scammers may not have to run much advertising after the first or two rounds, as excited market participants buy tokens.

Another area of token information to be cautious with is online media or YouTube channels, which specialize in spreading tips on what small tokens buy. These data sources are completely unregulated and can be paid to promote a token or project.

  • Look at the volume

Take a look at the token’s past trading volume, which is rising on the chart. If a major purchase occurs during the week and then a small volume pushes the token up, be careful. It is important to be able to get out of position without shifting the market, which is a function of the average volume of a token or stock.

  • Keep an eye on the media cycle

Most legitimate token projects will have a solid history of media coverage and communication with companies. Any viable project is likely to be presented both on GitHub, Medium, WallBTC and other resources, and it would be a very good idea to see what it publishes on its media portals.

There have been cases where attackers bought up an old, non-existent token and run a pump and dump scheme. Make sure a real development team is behind the token. If a token has an average account that’s been dead for years – it’s a hoax.

You need to know who is behind the token. The people developing the project are just as important as the idea they’re working on.  The team of managers is considered by many investors to be one of the most important parts of the investment thesis. Keep in mind that people may lie about who is working on a project, so it is necessary for anyone who wants to avoid fraud to carry out a real study.

Excellent investment and gray areas

Most pampa and dump schemes can fool investors because people think early involvement in a big project will make huge profits. In a way it’s true. However, do not forget that most companies fail, and when they fall, all invested capital is lost.

In the venture capital (VC) world, it is estimated that three out of every four (75%) venture capital backed companies will crash and take all the capital invested with them. These companies are not scammers: simply starting a new business is risky and they are unlucky.

Early participation means an investor can make a big profit, but statistically, an early-stage investor has a 75% chance of being wiped out during the initial period. These are low odds, which is why the venture market is such a difficult market for a stable profit.

There’s a reason pump and dump schemes target unsophisticated investors: it’s easy to dream of big profits, but professionals understand that risk is associated with any company at an early stage.

Professionals also understand that assets must be sold to record profits, meaning high liquidity and a broad investor base for the asset. Watching a token soar in price can be exhilarating for a new investor who doesn’t realise how difficult it is to actually sell a large position in the markets, and that’s what the scammers are on expect to make money.

When an investor buys a token that is part of a pumping and dumping scheme, it actually creates profits for fraudsters who sell in markets at a much higher price than they paid. Be careful and avoid these scams, or automate your trade so as not to worry about it If you happen to be the victim of a cryptocurrency pump and dump fraud, or just want to avoid the risk of getting into it, maybe you should consider using a bot for automatic trading.