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The Dangers of Pump and Dump

Even though the blockchain and cryptocurrency markets bring global economies closer and are working their way to drive trust and security into many different industries, they still come with certain drawbacks. As digital currencies are fairly new, and mostly unregulated, fraudsters are getting rich by spreading false information and fake news to affect the prices of their holdings.

One of the biggest scams a novice cryptocurrency contributor can fall for is the so-called pump and dump. Even though many experienced traders don’t know what this is, it is probably one of the most successful frauds that many new contributors repeatedly fall for. Today, the main element driving the power of pump and dump is the fake news.

In this article, we will define a pump and dump and describe how the scam works. The article serves as a way to understand and emphasize the problems that the cryptocurrency ecosystem faces so we can start working together to solve those problems and help bring around a full-scale adoption of cryptocurrencies and blockchain technology.

How Does Pump and Dump Work?

In a pump and dump scheme, a group of contributors colludes to artificially inflate the price of an asset. Misinformation, false statements, and fake news used on the Internet and social media help spread out the word, so the asset appears as a great deal, too good to miss out on. In most cases inexperienced traders go along with the scam and stock up on the cryptocurrency, buying into the promise of huge returns.

After the price goes up the insiders of the pump and dump scheme start selling the shares of an overvalued asset. They could profit for up to several times the price they bought the cryptocurrency at. The selloff then causes the price to fall and those naïve enough to have bought it walk away with huge losses.

With several cryptocurrencies in today’s market having a low market cap, it gets very easy for fraudsters to artificially drive prices upward in no time at all. The sudden increase in price then creates perfect conditions for other investors in the market to start buying the asset out of fear of missing out. But once the pump begins, it can be over in a matter of seconds.

How to Spot a Pump and Dump?

You can spot a pump and dump scam at the peak of the pump. It is characterized by the low market cap and low volume of the cryptocurrency that suddenly breaks out to unprecedented highs in a short period of time.  

Furthermore, it is possible to identify a pump and dump fraud even before it occurs. Because those involved require a significant amount of market share for the scam to work, they need to buy a large amount of the cryptocurrency in the time leading up to a pump. Buy or sell walls rapidly appearing and disappearing in low market cap cryptocurrencies are therefore a key red flag, pointing out to a pump and dump.

As we have already mentioned, fake news can be another key sign of a pump and dump scam. A pump is usually accompanied by misinformation involving the latest project growth or partnerships that fuel the fraud and scam people into buying it. Once you are aware of that, you can find the evidence of the scam on social media by seeing news of a cryptocurrency price surge due to questionable developments.

How to Avoid a Pump and Dump?

Nowadays, when contributors believe that even a moment of hesitation or indecision could lead to a loss of profit, the pressure to react quickly to breaking news is extremely high. But making hasty decisions, especially in the volatile cryptocurrency market, carries some significant risk.

One way to help avoid pump and dump schemes, is to look for news and stories on several trusted websites. If most of them have written about it, the news is more likely to be true. Another way is a precise examination of the presented article. Look out for facts and information provided by the parties directly involved in the story. No official confirmation or statements from official sources should raise your alarm bells. Don’t believe in statements that promise quick wealth. Thoroughly research any cryptocurrency and the companies behind it, to separate fact from fiction.

Research 

And finding good information from a variety of sources can test your patience. This is exactly why the BLOCKBIRD platform aggregates and gathers all the relevant crypto news, presenting it in one place. By using a combination of community collective intelligence and machine learning algorithms, we evaluate news, and expose any misinformation in the process. Interested in knowing more? Take a look at our website and join the BLOCKBIRD movement!

 

April 3, 2019, Nejc Horvat