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.
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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.
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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.
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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.
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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.
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