Pump and dump schemes are traditional market manipulation tactics which have found its space in the crypto world too. Scammers initially either create a new token or select a low value one with minimal traffic and usage. They then heighten its price by creating hype through social media, tik-tok, etc. Once the token hits the target price, they sell off their holdings leaving late investors with heavy loss.
The fast paced and unregulated nature of the crypto market makes it an ideal place to execute such schemes. Scammers reap the benefit generated through FOMO among users expecting to get hold of the next ‘Big’ coin. There are always signs like low liquidity or sudden price high often overlooked by the user.
Staying safe in the crypto market is not too difficult. Investors should always research before investing in the project. Token verification and information around locked liquidity should also be done beforehand. No investment should be made on behalf of hype, without checking its real-world utility. Staying aware and updated will help in trading safely forever. 
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We are living in an era where the world is going through a lot of changes, some good, some not so good. Almost every space is evolving and making room for new technologies to enter. Finance too remains such a sector. In fact, calling it the utmost sector going through massive change will not be an overstatement. Financial innovation, borderless transactions, and faster payments have been redefined thanks to the crypto revolution. A different perspective of investment and employment is taking shape and is evolving within.
Crypto brings the freedom from traditional financial regulations, it makes currency global. But these advancements bring in new kinds of risks; it’s like old scams with a digital makeover. One such threat that’s been a part of traditional finance too is ‘The Pump and Dump scheme’. This scheme, however, is working in a new avatar and moving at blockchain’s speed. Now operating in the digital space, this scheme is more accessible and much more dangerous than before.
Let us understand what this scheme is, how it works in the Web3 world, and how you can avoid being played?
What is a Pump and Dump Scheme?
A pump and dump scheme, as the name suggests, is a market manipulation strategy. One of the most popular ways to cheat users in the crypto world, it artificially ‘pumps’ the price of a low-value token through a lot of hype and misleading statements. Once the price goes relatively up, there comes a sharp sell-off from initial promoters or insiders. The quick crash in prices leaves investors with heavy losses. These schemes lure investors with the promise of quick gains in less time and exploit FOMO for their profit.
How Crypto Has Become a Breeding Ground for Pump and Dumps?
The crypto world is a never-sleeping, never-stopping space. It’s fast-paced and decentralised, which gives a perfect opportunity to scammers to cheat people.
Unstructured territories: Lack of regulations makes many tokens out of the reach of traditional financial monitors like the SEC.
Anonymity: Scammers and promoters hide behind anonymity. They operate through untraceable wallets and servers.
Easy token creation: Launching a token does not require any rocket science. Anyone can launch a token with a few lines of code with zero knowledge on a blockchain.
Community hype cycles: FOMO and social media play a crucial part in impulsive investing. Retail traders often go for opportunities laced with high risk, hoping to catch the next Bitcoin or Ethereum before it’s too late.
How Does It Work in Web3?
Launching tokens on platforms like Ethereum or Binance Smart Chain is extremely easy. This makes crypto vulnerable to pump and dump schemes. Here’s how it typically works-
Creation new token or targeting existing low value token – Scammers first create a setup. They either create a token or select a foggy altcoin with minimal trading activity and zero hype.
Build the Hype – Using platforms like Telegram, Discord, Reddit, etc., promoters create artificial buzz. They make wild claims like: “insider info”, “Next 100x token!”, “Backed by whales!”, “Exchange listing” etc. They use influencer marketing and fake YouTube videos to provide enough support for their theories. However, these statements remain highly unverified, meant to generate FOMO.
Pump the Price – As the community hype grows, insiders start investing in the token, making its price rise quickly. Late investors get trapped in the illusion of momentum and jump in before it rockets even more.
Dump the Bags – As soon as they get enough liquidity and the price hits the claimed target, insiders sell off their holdings, which leads to a rapid collapse in prices. Many such tokens crash up to 80–90% of their value within minutes or hours.
Silence and Vanish – Developers silent, promoters vanish, channels deleted, and investors? They are left with worthless tokens. There remains no way to recover funds or to hold anyone accountable.
How to Spot a Pump and Dump Token
Here are some red flags to keep in mind before investing in a new token:
- If there is a sudden price rise, then there is a possibility of artificial creation of demand without real news or updates.
- If there is excessive promotion being seen on social media, then there can be a possibility of spam marketing urging quick buys.
- If the project has low liquidity, then understand it will be hard to exit your position once the price starts falling.
- If you can see the top holders with their own huge supply, then there are chances that insiders can crash the price anytime.
- If there is no project utility or roadmap, then one must become cautious as there is no clear use-case, whitepaper, or real-world integration of the token.
- If there is no provision of locking liquidity, then there are chances of developers pulling all funds from the pool.
How to Stay Safe
Crypto investment can be a good way of earning passive income and having a secured investment only if you know where to invest. Here are a few things that you can do to make the best use of crypto trading:
Do real research – Never go for a token because some influencer names it ‘the next Bitcoin’. Go beyond reels and trends or influencer tweets in some cases. Go through their whitepaper, audit reports, tokenomics etc.
Check tokenomics – Always check how many wallets control the token’s supply share. Is the supply huge? Use tools like Etherscan or DEXTools to check if it is a few wallets that hold a large share of the supply.
Verify Locked Liquidity – A good project will always have locked liquidity to assure that there will not be a rug pull. Projects that don’t lock liquidity or use time-locked contracts may expose you to scams.
Avoid Projects with Only Hype – Do not become a part of a coin promoted by influencers or celebrities with no blockchain background. If a token’s value is based only on its price chart, then avoid.
Stick to Reputable Platforms – If it’s available only on some shady decentralized exchanges with no audits, then it’s a red flag.
Are Pump and Dumps Illegal?
If we talk about traditional markets, then yes, these schemes are illegal. However, the crypto space is evolving. Lack of regulation and anonymity makes enforcement murky. The good news is that there are regulators like the SEC and CFTC, and in some cases even Interpol, who have started tracking down high-profile cases using blockchain analytics.
Final Thoughts
Crypto is one of the most promising sectors. It’s evolving and learning, all the while providing users the opportunities to grow. Not to forget that there is a thin line between these opportunities and scams. Never let greed cloud your judgment, for scammers trap those who play on their desire of wanting more in no time. Hence, always check the red flags before making investments. Pump and dump schemes are a painful lesson for many. By guarding yourself with knowledge and asking the right questions, you can navigate the crypto world safely.
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FAQ
What is a pump and dump scheme?
It’s a scam where the price of a token is wrongly inflated using hype and misinformation. Once they hit their target, the insiders sell off their holdings. This causes the prices to crash leaving late investors with huge losses.
Why is crypto vulnerable to pump and dump schemes?
Creating tokens is easy. It takes a few lines of code and you are good to go. There is severe absence of regulation and presence of anonymity in Web3. A combination that makes it easier for scammers to operate fearlessly.
How do these schemes typically unfold?
It starts with creating a buzz around a low-value token via social media. Insiders then pump up its price purchasing it. Once they get enough liquidity, they dump it and make their profit. This crashes the market for others.
What red flags should I look for before investing?
One can always be cautious and look out for sudden price spikes for no reason except social media / influencers hype, low liquidity / no locked liquidity, unclear roadmaps, a handful of wallets holding large supply. These are some key indicators that signal towards a possibility of scam.
How can I protect myself?
Always research about the project before putting your money. While doing that make sure to study its tokenomics and locked liquidity. Also, it is preferable to stick to reputed exchanges for being on the safer side.
