Pump and Dump Schemes: How to Protect Yourself from Cryptocurrency Fraud in 2023

The cryptocurrency market has been a hotbed of innovation, attracting both legitimate investors and opportunistic individuals seeking to exploit its volatile nature. Among the unethical practices that have emerged is the notorious “pump and dump” scheme. In this article, we will delve into the details of the pump and dump scheme, shed light on its illegality, address frequently asked questions, and caution against falling prey to such manipulative tactics.

Understanding Pump and Dump Schemes

A pump-and-dump scheme is a manipulative tactic commonly employed in the financial markets, including the crypto market. It involves artificially inflating the price of a particular cryptocurrency through aggressive marketing and false information dissemination. Once the price has reached a certain level, the schemers sell their holdings at a profit, causing the price to plummet rapidly, leaving unsuspecting investors with significant losses.

Also read: Beginner’s Guide to Crypto Industry

The Mechanics of a Pump and Dump Scheme

1. Promotion: The organizers of a pump and dump scheme form a group or syndicate to coordinate their efforts. They strategically select a relatively low-volume and low-value cryptocurrency, making it easier to manipulate its price.
2. Accumulation: The schemers acquire a significant amount of the selected cryptocurrency at a low price before the scheme is set in motion. Their objective is to ensure they have a substantial position to sell at a profit.
3. Hype and Promotion: The syndicate members engage in aggressive marketing tactics, often using social media platforms, forums, and chat groups to spread positive news and hype about the targeted cryptocurrency. They may use false claims, exaggerated projections, and endorsements from prominent figures to lure unsuspecting investors.
4. Price Surge: As more investors are enticed by the hype and begin buying the cryptocurrency, its price starts to rise rapidly. This surge is fueled by both the initial investment of the organizers and the influx of new investors hoping to capitalize on the perceived opportunity.
5. Dump: Once the price reaches a peak, the schemers initiate the dump phase by selling their holdings in large quantities, flooding the market with supply. This sudden influx of supply leads to a rapid price decline, often leaving latecomers with substantial losses.

Examples of Pump-and-Dump Schemes

• Squid Game Token: In November 2021, the Squid Game token was launched on the Binance Smart Chain. The token was based on the popular Netflix series “Squid Game,” and it quickly gained popularity. However, the token was quickly revealed to be a scam. The developers of the token rug pulled investors, meaning they sold their tokens and crashed the price. Investors who bought the token lost a lot of money.
• MINISHIBA: In December 2021, the MINISHIBA token was launched on the Ethereum network. The token was marketed as a “mini” version of the popular SHIBA INU token. However, the MINISHIBA token was also a scam. The developers of the token rug pulled investors, and the price of the token crashed. Investors who bought the token lost a lot of money.

Legality of Pump and Dump Schemes in Crypto

Pump and dump schemes are unequivocally illegal in most jurisdictions, including the crypto market. Such schemes manipulate the market, defraud investors, and violate securities laws. Regulatory bodies and law enforcement agencies have been increasingly vigilant in combating these illicit activities. Perpetrators can face severe penalties, including substantial fines and imprisonment.

Conclusion

Pump and dump schemes represent a dark side of the crypto market, exploiting investors’ trust and manipulating prices for personal gain. Investors must exercise caution and skepticism when encountering suspicious claims and sudden price surges. By staying informed, conducting thorough research, and seeking guidance from reputable sources, individuals can protect themselves from falling victim to these fraudulent schemes. Ultimately, fostering a transparent and regulated cryptocurrency market will be crucial in deterring and eradicating pump and dump activities.