Have you ever felt bombarded by social media? Anytime you’re on Twitter or YouTube, it feels like ad after ad, right? And, with all the different advertising, it seems like you need to be more vigilant against all forms of malicious ads. Well, you wouldn’t be the only one to feel that way.
In recent years, the growth of social media has pushed fraud to the next level. This is because of social media’s ability to influence someone’s perception of potential investments. Because of this, it’s important to be cautious with crypto influencers and anything that promises you riches through questionable altcoins. Some of these schemes are called pump-and-dump and if you don’t want to be a victim of a rug pull, keep reading. To help you stay in the know, let’s break down what crypto pump-and-dumps are and how they operate.
What is a crypto pump-and-dump scheme?
A pump-and-dump scheme is a type of fraud that uses hype and misinformation to generate false interest in an altcoin, token, or coin that has no known and immediate purpose. Malicious actors initially amass large amounts of questionable coins when the price is still low, then pump the price by marketing it through social media.
In the past, pump-and-dump schemes were peddled through word of mouth. Now, with the rise of the Internet, most of the false information is spread through social media platforms, forums, videos, and other online media. Fraudsters also work with influencer investors who receive financial incentives for hyping people and raising the value of a questionable coin.
Once the price reaches its peak and the misinformation has caused a buying frenzy, fraudsters and influencers will “dump” all their crypto by cashing out for a huge profit. The selloff will then cause the coin’s price to nose dive well below its original price. Most coin holders won’t be able to sell in time and will be left holding the bag. This means they will be stuck with these questionable coins and lose their money.
Bear in mind that there are various pump-and-dump schemes out there and all of them are illegal and have serious implications (such as heavy fines) if caught.
To give you an idea of how this all works, let’s break down an example.
Let’s say a token (we’ll call it MoonSoon) is advertised in an Instagram post by a super famous rapper and crypto influencer, Soup Doge. With Soup Doge’s Instagram post, the price of MoonSoon soars. However, a few days later, the developers behind the coin begin to sell all their shares. Without warning of impending danger, you are unable to sell your coins and the original sell price plunges. Soon, all your investment money vanishes and you never hear of MoonSoon again. This is one example of how a lot of people are fooled by crypto influencers.
How does a crypto pump-and-dump scheme work?
The huge question behind pump-and-dump schemes is why do they work so well? It’s been around for a while, so what attracts people to pump-and-dump schemes? Blame FOMO or fear of missing out. As misinformation and hype are peddled, many investors get so excited about earning money that they invest without proper research. These people don’t want to miss out and will buy shares impulsively.
ICOs and pump-and-dump schemes
To gain even more earnings from crypto pump-and-dump schemes, these criminals will also look into initial coin offerings (ICOs), which are similar to a fundraiser. Investors who believe in a specific token will put their money into its development. In return, they are rewarded with new tokens and the ICOs will use the money to further develop their coin.
Unfortunately, not all ICOs work this way since some of them are schemes. Many fraudsters target ICO investors because these people are ready and willing to make a purchase. On top of that, there are certain bots called “pump bots” that can buy and sell shares in a matter of seconds. Even if there is a legitimate ICO, sometimes these pump bots can still affect the token, the investors, and the prices at the beginning of a release simply by operating and having users.
To understand the difference between a safe ICO and a fraudulent one, you need to know what makes up an ICO. It typically begins with a fully published white paper that includes what the project is about, its applications or use cases, the requirements to finish the project, and how much money is needed.
A fraudulent ICO may have these red flags:
- There is no whitepaper
- The whitepaper’s working model isn’t realistic
- The people behind the ICO have fake identities or are known frauds
- The ICO’s roadmap isn’t detailed enough or clear
- The ICO’s code looks suspicious
- The developers are difficult to contact for Q&A sessions
Alleged pump-and-dump schemes
Now you know what a crypto pump-and-dump is and how they work, let’s discuss notable examples.
- FaZe Clan and Save the Kids Crypto: Several members of the e-sports organization, FaZe Clan, supported a new altcoin: Save the Kids. They promoted the cryptocurrency through a series of Tweets and videos. People bought into the coin and then a few days later, the altcoin fell 60%. The members of FaZe Clan that were involved in the scheme pumped interest into Save the Kids and then potentially pulled the rug from investors. While members of the clan deny the allegations, Save the Kids crypto suspiciously looks like a pump-and-dump scheme. Since then, the involved members have been suspended or removed from FaZe Clan.
- Tana Mongeau and TitsCoin: Influencer Tana Mongeau did something similar to FaZe Clan’s scheme when she promoted her coin on her Instagram story. Long story short, the coin was a pump and dump scheme and investors lost their money.
How to avoid falling for crypto pump-and-dump schemes
So, we’ve discussed examples, red flags, and the basics of pump-and-dump. Now, let’s get into avoiding these schemes. Follow these tips to keep your hard-earned money away from pump-and-dump schemes.
- Do your research
Part of uncovering a pump-and-dump scheme is to do your research. If you want to know if an altcoin is a hoax, try looking into its whitepaper and doing research on the company funding the token.
- If it’s too good to be true…
While this isn’t always the case, remember that typically, if it’s too good of a deal, then it’s probably too good to be true. Be wary of amazing deals that check off everything you’re looking for in a cryptocurrency.
- Be skeptical of the source
When a pump-and-dump is trying to get more investors, they will push out marketing materials and press releases. It’s also very easy for developers to create fake websites and social media accounts, so don’t take their content as gospel. Make sure to do your look into these sources with a skeptical eye. Find a source of truth that you can rely on before making any hasty investment decisions.
- Avoid cryptos from /r/CryptoMoonShots
If the crypto or project you want to invest in is promoted in that subreddit, it is probably a scheme to take your money. CryptoMoonShots is an echo chamber with the sole purpose of shilling out bad coins. Also, stay away from coins with names like “elon,” “safe,” or “moon.”
- Understand what a pump-and-dump looks like
Understanding what a pump-and-dump looks like is key to protecting your money. Read carefully into the red flags we mentioned earlier and see if they match your potential investment.
- Do background research of the people involved
Doing background research on the developers will help you learn not only about their skills and experience but also give you the confidence to know that they are not hiding their identity. Most blockchain projects put up the names and photos of their developers on their website as well as their LinkedIn pages to prove their legitimacy. This means that if they ever do a rug pull, you know who’s accountable.
Staying safe in the crypto space
Since the world of altcoins and crypto is a new and upcoming field, it can be hard to keep up. Whether it’s a crypto pump-and-dump scheme or something else entirely, always be on the lookout for people trying to take advantage of you.
However, don’t let these schemes deter you away from crypto. There are a lot of great and safe crypto companies out there. Just be sure they pass all your safety checklists and take everything with a grain of salt before you decide to make an investment. So, remember, be smart, stay safe, and most importantly, do your research.
*The content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. You should carry out your own independent verification of facts and data and may want to seek professional advice before making any decisions.