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How to Stay Safe From Crypto Pump-and-Dump Schemes

Pump-and-dump schemes didn't originate in the crypto market, but they have become a significant concern across the Web3 ecosystem. Numerous fraudsters use blockchain's decentralization and crypto's price volatility to pull off these unethical trading scams.  

If you’re thinking about buying altcoins, you need to know what a crypto pump-and-dump scheme is and how to avoid it. Learning the warning signs of crypto pump-and-dump schemes can help save you from incurring significant losses. 

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What are pump-and-dump schemes? 

A pump-and-dump scheme is a form of market manipulation that involves groups of scammers who spread misinformation to inflate the value of their stocks or tokens. This strategy aims to get as many retail investors to buy the pump-and-dump group's assets. After "pumping" up the price, the fraudsters will sell (or "dump") their holdings.

Pump-and-dump schemes often target stocks or cryptocurrencies with a small market cap, low volume, and low liquidity. These tiny projects don't need as much capital to make dramatic price movements. Also, since these projects are under the radar, it's easier for schemers to conceal their operations. 

Once pump-and-dump groups have enough of their target digital asset, they promote fake positive news to entice people to buy the stock or crypto. Before the internet, many pump-and-dump groups relied on "cold calling," which means they'd call random people and try to sell them shares. Today, it's more common for pump-and-dump schemers to use social media sites, SMS, or email to target retail investors. 

Pump-and-dump schemes have a long history in public financial markets, but they have become more prevalent in cryptocurrency. The primary reason pump-and-dump schemers gravitate toward crypto is the lack of federal oversight. 

The U.S. Securities and Exchange Commission (SEC) outlawed all pump-and-dump schemes in the stock market. Therefore, if a pump-and-dump group is caught manipulating stocks, they’ll face severe penalties. 

In contrast, there are no clear federal guidelines on the legality of pump-and-dump schemes in crypto exchanges. Also, the decentralized nature of blockchain technology makes it challenging for investigators to track crypto pump-and-dump groups. 

How do crypto pump-and-dump schemes work?

Most of the best-known crypto pump-and-dump groups organize their operations on social media sites like Discord or Telegram. The leaders in these groups let insiders know what their target token is on a daily or weekly basis. 

After everyone has acquired enough of their chosen token, the group starts spreading misleading articles on social media sites to entice retail investors. If a pump-and-dump group has ties with social media influencers, they may get them to endorse the target cryptocurrency. It's common to find pump-and-dump schemes promoting crypto projects on sites like Discord, Twitter, and Telegram.

If these marketing strategies become successful, they can cause a surge in demand for the target cryptocurrency. Once the price of a token goes parabolic, the pump-and-dump group will cash out. This intense sell pressure pushes the token's price down, resulting in heavy losses for those who bought at or near the top. 

Is crypto pump-and-dump illegal? 

Although crypto pump-and-dump schemes are unethical, it's difficult to say whether they're illegal. If the pump-and-dump group didn't create its own target token or write malicious code into a cryptocurrency, it might be technically legal. This is especially the case if pump-and-dump schemers focus on decentralized exchanges (DEXs) rather than centralized exchanges (CEXs). 

DEXs like Uniswap and PancakeSwap don't require personal IDs to trade on their platforms. All that people need to interact with a DEX is a crypto wallet. Also, these DEXs tend to attract many micro-cap cryptocurrencies that are easy for fraudsters to manipulate. Due to the enhanced anonymity in DeFi (decentralized finance), it's easier for schemers to hide their operations from federal authorities. 

Although cryptocurrency pump-and-dump schemes are in a legal gray area, more regulators are aware of this threat. As crypto becomes more mainstream, federal governments put forward pump-and-dump regulations similar to those governing the stock market

Also, projects like Worldcoin are working on new technologies to increase transparency on Web3 without sacrificing user privacy. Innovations like Worldcoin's Orb can verify a crypto wallet has a unique human owner without requiring know-your-customer (KYC) documents.

Are crypto pump-and-dump schemes the same as rug pulls? 

Pump-and-dump schemes are a type of crypto scam known as a "rug pull." These scams involve market manipulators who spread false information about a crypto project and eventually sell their tokens (or "pull the rug") after enough retail investors buy into the currency. 

Although all pump-and-dump schemes are rug pulls, there are many alternative rug pull techniques in crypto. "Hard rug pulls" require developers to code their tokens or Web3 projects to restrict retail investors from selling a sham cryptocurrency. If investigators discover a rug pull group used malicious code, they’ll likely face criminal charges. 

How to spot a pump-and-dump in crypto

Sometimes, it can be challenging to spot the differences between legitimate advertising and pump-and-dump spam. However, here are a few warning signs investors can use to spot a pump-and-dump scheme:

  • Obscure crypto projects with limited information: Pump-and-dump schemes always manipulate tokens with small market caps and little reliable information. If you can't find data on a cryptocurrency's leaders or a detailed road map, chances are it's a pump-and-dump. 
  • Excessive campaigning on social media: The more frequently you see excessively spammy messages for a small cryptocurrency, the greater chances these ads aren't legitimate. 
  • Identical messages on multiple sites: Many pump-and-dump schemes copy and paste messages across various social media platforms. 
  • Promise of specific high returns: Whenever a crypto project promises a specific return on investment (ROI), there's a good chance it's a Ponzi scheme. 
  • Sudden spikes in trading volume: A random surge in trading activity for a small cryptocurrency probably means market manipulators are at work behind the scenes. 

Pump-and-dump scheme examples 

To better understand how pump-and-dump schemes work, here are a few notable scams from the stock and crypto markets

  • Radio Corp. of America (RCA) stock: Back in the 1920s, a group of Wall Street insiders conspired to artificially increase RCA's stock price. Initially, this "Radio Pool" bought shares among themselves to generate excitement in the stock market. As more retail investors saw RCA climbing, they started to invest in the stock. Once the Radio Pool was satisfied with its gains, it sold off its position for a profit in 1929.
  • John McAfee's crypto pump-and-dump schemes: The software engineer John McAfee organized multiple pump-and-dump schemes during the 2017-2018 crypto bull run. During this time, McAfee promoted altcoins like Dogecoin, DigiByte, and Humaniq on specific days, thus triggering a price pump. McAfee's team sold its token holdings shortly following McAfee's announcement. The SEC and the U.S. Department of Justice brought fraud charges against McAfee in 2020 for these schemes. 
  • EthereumMax (EMAX): Celebrities like Kim Kardashian and Floyd Mayweather promoted the tiny cryptocurrency EthereumMax in 2021. Soon after these public figures began drawing attention to EMAX, the price rose thousands of percentage points before losing almost all its value. In early 2022, a California class action lawsuit alleged these celebrities colluded with EMAX in a pump-and-dump scheme.

How to stay safe from pump-and-dump scams

Altcoin (or non-Bitcoin) traders should always carefully screen projects they're thinking about investing in. Here's a quick crypto checklist comprising best practices to reduce the risks of dealing with a pump-and-dump scam:

  • Stick with well-recognized cryptocurrencies: Consider sticking with cryptocurrencies that have a long track record in the industry to avoid pump-and-dump schemes. Always treat small-cap tokens with skepticism. 
  • Look for transparent information on a new cryptocurrency: Conduct plenty of research on a new crypto project on trusted third-party sites like CoinMarketCap and CoinGecko. Finding transparent information on the cryptocurrency's leadership and road map shouldn't be difficult. 
  • Steer clear of small tokens with sharp price spikes: Although crypto prices are volatile, it's always suspicious when a small-cap altcoin has an unexplained price spike. Avoid chasing parabolic chart patterns, especially with low-cap crypto projects. 
  • Turn toward high-profile CEXs or DEXs: Pump-and-dump schemers tend to target tokens that are only available on small and illiquid exchanges. If you want to purchase an altcoin, consider using platforms with high liquidity, a reputation for security, and a long history in the industry. 

Wrapping up 

At Worldcoin, we aim to reduce the incidence of pump-and-dump schemes with our Orb technology. This new eye-scanning device can verify a crypto wallet has a unique human owner without requiring ID paperwork. We intend to put a share of our crypto in the hands of every individual for free. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to know more about the cryptocurrency market. 

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