You may have heard of pump-and-dump schemes — when investors take advantage of an asset in a steep price increase (pump) followed by an even faster price fall (dump). These schemes can happen with different types of assets, including cryptocurrency.
How to Identify a Crypto Pump-and-Dump Scheme There’s no rule for figuring out if a cryptocurrency is being used in a pump-and-dump scheme, which leaves investors to do their own research and use their own best judgment when deciding to take a chance on a coin.
The biggest indication of a pump-and-dump scheme might be the excessive hype built up around a token or project. When someone writes a marketing email or social media post using phrasing like “this crypto is the next big thing,” or “this is Bitcoin 2.0,” and the price quickly rallies, it might signal a pump-and-dump.
Sharp Rise in Price
Another indication of a pump-and-dump scheme is the parabolic rise of a cryptocurrency’s price in a short period of time. This is especially true if the coin was previously unknown, ignored, or forgotten, but it can happen to any coin.
When positive “news” tends to coincide with the purchases made by insiders, it adds to the illusion of something big happening. This creates a positive feedback loop where more potential buyers see what’s happening and bid prices up even further until what might just be an inevitable crash.
Whenever a new cryptocurrency gets launched (in an initial coin offering or ICO), it often serves as a pump-and-dump for a time. People become intoxicated by the promise of a new project, bid up prices, then the initial investors begin to cash out.
Countless altcoins have fallen victim to crypto pump-and-dumps at some point throughout the years, and while there’s no way to predict a pump-and-dump, there are red flags to watch for.