What is a pump and dump in crypto?
A pump and dump in crypto is a market manipulation tactic where the value of a token is artificially inflated to attract participants, then sold off, causing the price to crash.
This scheme typically involves four phases: pre-launch, launch, pump, and dump, with the first three phases designed to instill fear of missing out (FOMO) within participants.
To avoid falling victim to pump and dump schemes, it's crucial to watch out for red flags and make decisions based on data and logic rather than emotions.
Understanding Pump and Dump Schemes
A pump and dump scheme in the crypto world is a fraudulent practice where the orchestrators create or acquire large amounts of a low-value cryptocurrency, promote it to inflate the token price artificially, and then sell off their holdings to unsuspecting participants.
When these orchestrators dump their tokens, the supply increases as the price decreases.
Since many of these assets have little to no value, their prices will not recover after the orchestrators dump their holdings. This leaves innocent participants stuck with nearly worthless tokens while the orchestrators tally their gains.
The Four Phases of a Pump and Dump Scheme
Pump and dump schemes typically have four phases: pre-launch, launch, pump, and dump.
The pre-launch phase involves building hype around a relatively worthless token. This is often done through tactics like allowlists and pre-sales to build a base of initial participants.
The launch phase involves employing promoters to bring in more potential victims to the project.
The pump phase sees the price of the asset skyrocket as more participants engage.
Finally, the dump phase involves the orchestrators selling off their holdings once the token price has reached a level they deem profitable. This massive sell-off causes the token's supply to far exceed its demand, thereby tanking the price.
Spotting a Pump and Dump Scheme
Spotting a pump and dump scheme requires vigilance and a healthy dose of skepticism.
Some red flags to watch out for include a rapid increase in the price of a crypto asset without an apparent reason, limited information about the asset, and a sudden surge in the asset's trading volume.
If a participation opportunity seems too good to be true, it probably is a scam.
The Impact of Pump and Dump Schemes
Pump and dump schemes can have a significant impact on the crypto market and individual participants. They can lead to substantial financial losses for participants who engage with the inflated prices and are left holding nearly worthless tokens when the price crashes.
These schemes can also damage the reputation of the crypto market, making it seem more risky and volatile than it might otherwise be.
Protecting Yourself from Pump and Dump Schemes
Protecting yourself from pump and dump schemes involves staying informed and making decisions based on data and logic rather than emotions. Be wary of participation opportunities that promise high returns with little risk, and always do your research before engaging with a new token. It's also a good idea to diversify your holdings to spread your risk and avoid concentrating all your resources in one area.
