Learning about the cryptocurrency ecosystem is essential for investors to consider in a bear market during a bull market. However, knowing the basics of cryptocurrency investment requires being vigilant for scams threatening to take away assets in a flash or pump-and-dump scams.
As cryptos rise to new levels, people are getting involved in the game of investing in crypto. This makes the crypto market appealing to scammers. The cryptocurrency market is vulnerable to scams that are typical of the pump-and-dump. Because many regulations are unclear and difficult to enforce by regulators, Thinly traded cryptocurrencies are the most popular targets for fraudsters and other bad actors.
What exactly is a fraud known as a pump and dump?
The scams of pump-and-dump have been around since the creation of the securities market. The concept is that a group of people invest in an asset that is traded thinly, such as the penny stock, if its value is low. Then, they start to spread positive information concerning the assets. Most of the time, the positive news they are distributing is fabricated.
Investors continue to invest in the investment, and the price continues to rise. After the price is “pumped,” the originator of the fraud sells their stake to buyers still in the market. As they control a significant portion of outstanding shares, that sends the price crashing.
Pump-and-dump schemes are an example of fraud. The people who created the scheme intend to steal innocent investors’ money by enticing them to purchase an investment based on incorrect information. When investors invest in the scammer, he sells to push the price down. The result is enormous profits for the fraudster and considerable losses to all the defrauded people.
In the cryptocurrency exchange market, it is recommended to stick with the most well-known and widely-used cryptocurrencies exchange like Binance, KuCoin (KCS), and prominent exchanges that will keep you safe in the case of pump-and-dump frauds.
How can you spot a pump-and-dump cryptocurrency scam?
It’s not difficult to recognize an untrue pump-and-dump cryptocurrency scam after the event. But it won’t do cryptocurrency investors any good once the rug has been pulled and they’re left with the bag. Investors must know the warning signs of a pump-and-dump fraud before it occurs.
The first step to avoiding the pump-and-dump scam is to investigate. If you spot an obscure cryptocurrency being marketed by strangers on the internet, Don’t rush into it. Find the cryptocurrency, locate the white paper, and read through the document. Identify the people behind it and their goals. This should be done for every cryptocurrency you consider to determine whether there’s a long-term possibility for it to grow in value.
If the token was in circulation for some time, the progress of the project appears to have stopped, and it’s best to stay clear of it. Suppose the project doesn’t have a clearly defined purpose. In that case, it claims unrealistic benefits, and its development plan isn’t thought-out or associated with prior bad actors. These can also be indicators.
Most exchanges will display all open orders for an asset and an order’s history. Look at the pattern of the volume of trading. If the book has increased recently and appears to be increasing, be wary. If you notice large walls of the cryptocurrency asset on the buying side, there’s a chance that a large group is trying to ensure that the price of the coin doesn’t drop below the price. Also, you might notice the massive wall of sellers making sure that the price doesn’t rise over the top when the organizers pile on the cryptocurrency.
How can you protect yourself from the dangers of dumps and pumps?
Dumps and pumps are typically limited to coins with little trading volume and small market capitalizations. By staying clear of cryptocurrencies that are not liquid and avoiding illiquid currencies, your odds of falling victim to a pump or dump are greatly diminished. Also, not following financial advice from social media or paid news articles can stop you from suffering losses because of this kind of market manipulation. It is not sure that the crypto media companies have conducted any checks on the currencies they use, and, as previously stated, many of these stories are paid. However, the source of payment is not revealed.
An excellent general rule is to be aware that anyone who says they know which cryptocurrency they will pump the next time has a motive behind it.
An abrupt increase in price that is not backed by factual evidence to support the price could indicate the possibility of a pump and dump plan in progress. Therefore, when the price chart suggests that there is a pump in progress, it is recommended to stay clear of the coin unless you’ve researched the cryptocurrency and its future potential value.
