How To Spot And Protect Yourself From Crypto Pump And Dump Scheme

As cryptocurrency markets launch their bull run from 2021, investors should be cautious of the crypto pump and dump scheme. However, this article discusses which coins are most likely to be targeted. Likewise, how you can spot a crypto pump and dump scheme as an investor. So, keep reading to explore more further on this topic.

Cryptocurrency Brief Review

While bitcoin has established itself as an accepted alternative asset class. With regulated exchanges, institutional investor interest, and its own futures contracts. However, many altcoins continue to operate in a wild west environment. Even with reputable projects falling victim to 51 percent attacks, as the 51 percent attack on Ethereum Classic demonstrated. While the cryptocurrency markets remain bullish overall, investors should be aware that many cryptocurrencies with low market capitalizations. As well as trading volumes remain vulnerable to being hijacked by so-called crypto pump and dump schemes.

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Pump And Dump Crypto

Numerous news stories have hinted at or provided anonymous accounts of schemes involving pump-and-dump schemes to manipulate cryptocurrency trading. A recent Wall Street Journal report provides conclusive evidence. The report takes an in-depth look at how pump-and-dump schemes operate. According to the Journal, crypto pump-and-dump schemes accounted for $825 million in trading activity and “hundreds of millions of dollars in losses” over the last six months. Between January and the end of July, 125 pump-and-dump operations took place, manipulating the prices of 121 different coins.

The Journal reports that crypto pump-and-dump schemes work similarly to the early days of the stock market. During that time period, a small group of traders caused chaos in the markets by manipulating prices through group purchases.

In cryptocurrency markets, a similar dynamic occurs. A swarm of traders evangelizes for a coin through multiple platforms, including social media. They then orchestrate a concerted buying binge for it. As the coin’s price increases, other traders unaffiliated with the pump-and-dump party enter the buying frenzy, further boosting the coin’s price. Meanwhile, the orchestrated operation is replicated but this time the coin is sold when it hits a predetermined price. This results in a precipitous decline in its price. While the pump-and-dump party gains. Perhaps, other traders who invested in the coin on the basis of false promises are left with losses.

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What Is Crypto Pump And Dump Scheme?

Pump and dump schemes are a form of securities fraud that dates all the way back to the 1980s and initially targeted the stock markets. More precisely, on small-capitalization stocks. A pump and dump scheme in the stock markets works by having a small number of investors. Who picks and buys shares in a business with a low market capitalization, triggering an initial price spike.

Following that, call center operations more generally referred to as boiler rooms contact prospective private investors. In order to convince them to buy the stock by offering misleading information. As well as suggesting that the stock is about to experience significant profits. Once a sufficient number of investors has been duped into buying the stock and the price has increased enough. However, the initial group of investors will sell their holdings to benefit, before the price falls. And that will make all the subsequent investors suffer significant losses. Meanwhile, discover how you can make money investing in stocks.

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Deeper Explanation On Pump and Dump Scheme

The truth is, this form of securities fraud has spread to the cryptocurrency markets as well. While the modus operandi has shifted, pump and dump schemes continue to thrive in the unregulated altcoin market. These schemes are designed to exploit low-capitalization cryptocurrencies and digital tokens. Which are easily manipulated due to their low trading volumes. Rather than using boiler rooms, price pumps are conducted through the dissemination of hype. As well as false information about a coin on social media.

However, members of pump and dump groups communicate through encrypted messaging services such as Telegram. Where groups can number in the thousands and are usually only accessible by invitation. In these group chats, a coin that will be “pumped” will be revealed after the purchase of the coin by the scam’s original perpetrator. Within minutes, community members often purchase and then share fake news about the coin on social media. As well as blogs, and sometimes even on credible news outlets through paid-for-sponsored material.

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Meanwhile, after the price has risen significantly, the pump’s initiators sell their coins, accompanied by other members of the pump and dump messaging community. Then the price crashes again, resulting in significant losses for all investors who purchased after the price spike.

How to spot crypto pump and dump scheme

The simplest way to spot a crypto pump and dump scheme is when the price of a coin unknown unexpectedly increases significantly without any legitimate explanation. This is clearly visible on the price chart of a coin. For example, Coincheckup has established a benchmark of a 5% price increase in less than five minutes as its indicator.

In addition, when paid news articles about a small-cap coin appear in conjunction with an increase in social media activity around the cryptocurrency project, this could indicate the start of a pump. Therefore, when an entirely unknown coin with a market cap of just a few million dollars unexpectedly appears on Twitter and Facebook, one should exercise caution. However, below is the good news!

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The CFTC Will compensate Whistleblowers Of Pump and Dump

To tackle the unfortunate phenomenon of cryptocurrency pump and dump schemes, the United States Commodity Futures Trading Commission declared financial rewards for whistleblowers who expose such pump and dump operations.

The CFTC recently issued a consumer advisory alerting investors to the dangers of cryptocurrency pump and dump schemes. The CFTC warns customers in the announcement to “stop pump-and-dump schemes that can occur in thinly traded or new alternative virtual currencies, digital coins, or tokens.” Customers should avoid purchasing virtual currencies, digital coins, or tokens on the basis of social media recommendations or unexpected price spikes.”

Along with its warning, the CFTC informed consumers that they could be eligible for a monetary award of between 10% and 30%. Only if members of pump and dump groups provide original information that leads to monetary sanctions of $1 million or more.

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Meanwhile, paying whistleblowers is not a new concept and is still widespread in traditional financial markets. For instance, the SEC pays out hundreds of millions a year. However, it was only in 2019 that US regulators began to take an interest in the cryptocurrency markets. Now, the question is, how can you protect yourself against this crypto pump and dump? Keep reading to find out how.

How You Can Protect Yourself From Pump and Dump Scheme

Generally, pump and dump operations are limited to coins with extremely low trading rates and market capitalizations. By avoiding illiquid cryptocurrencies, you significantly reduce the risk of falling prey to a pump and dump. Additionally, avoiding investment advice from social media or paid news articles can protect you from incurring avoidable losses as a result of this form of market manipulation.

A sharp rise in price without credible news to support the increase is a sign that a pump and dump scheme is about to unfold. Thus, if the price chart indicates that a pump is underway, it is prudent to avoid the coin entirely. Unless you have conducted sufficient research into the digital currency’s possible future value.

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The BitcoinTalk forum is a good place to start, as Reddit can be a good source. The broader cryptocurrency culture, in general, prefers to self-regulate and call out dishonest players who jeopardize the community’s credibility. However, contacting cryptocurrency ventures directly and obtaining answers to your questions is an even better way to conduct research on a coin prior to investing. You can also run a personal research analysis, that will assist you as an investor in making more informed investment decisions.


Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is extremely risky and speculative, and this article does not constitute an endorsement of cryptocurrencies or other ICOs by Neptunmag or the writer. Since each individual’s circumstance is special, it is always wise and important to consult a trained professional before making any financial decisions. Neptunmag makes no promises or claims about the accuracy or timeliness of the information contained herein. Always, conduct a thorough self-research on any coin both high and low trading value before investing in it. Hopefully, you have understood in this article, how you can spot crypto pump and dump scheme, and also how you can protect yourself.

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Over to you: Have you ever fallen victim to any crypto pump and dump scheme before? Kindly share your thoughts, lessons, and advice with us in the comment section below. Thank you!

Chiemerie Ozurumba (Adorablepen) is a freelance writer & Computer Science degree holder, a personal finance expert, blogger, public speaker, and poet. He is also a relationship & life coach. Currently a writer at BusinessYield.

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