What is a pump and dump scam?
How to identify pump and dump Pump and dump scams are a form of fraud that has emerged from the conventional financial market for cryptocurrencies. So what is pump and dump? How to identify pump and dump.
What is pump and dump scam?
Pump and dump scam is a form of fraud in which the perpetrator creates an altcoin, then pumps the price through a number of forms such as advertising, adding liquidity... to lure investors. Finally, the scammer sells all the altcoins they own and brings the value of the token to zero.
Tokens created for scam purposes often do not have much value, resulting in these tokens not being able to recover their price after a "pump and dump". According to Chainanalysis, in 2022, up to 24% of scam projects will use pump and dump form. Investors spent 4.2 billion USD to "hold" tokens and scammers profited up to 30 million USD.
Usually, scammers have to create "hotness" for their tokens to facilitate the token pumping process. Therefore, the way pump and dump usually works is as follows:
Tokens created with the initial purpose of fraud often do not have much intrinsic value, leading to scammers having to create a craze to attract investors to buy fraudulent tokens. Therefore, the model to attract users most easily is pre-launch.
Pre-launch is a form that allows a certain group of people (whitelist, allowlist) to have the right to buy tokens before the community at a lower price. Because pre-launch limits buyers, if users are whitelisted, allowlist obviously feels like they have more privileges. From there, the scam project was able to build its first buyer file.
Launch
After the pre-launch phase, the project will begin to push into the marketing phase through seeding on social networking platforms such as X, Facebook... Some scammers even accept to spend a lot of money to hire KOL seeding for the project. According to ZachXBT, there have been many cases of KOL seeding fraudulent projects such as Dwight Howard, Crypto Rover...
The purpose for marketing and seeding from the project is to create a FOMO effect for investors who missed the pre-launch round. From there, the buyer file continues to expand.
Pump
After both of the above stages are successful and users start buying tokens, the token price will obviously increase gradually. Scammers will even continue to inflate the token price even higher through many different forms, aiming to create more FOMO effects and attract new buyers.
There have been many cases of memecoins that were only launched a few hours ago and increased 1,000% due to the above FOMO effect. The more people buy, the more the price increases.
Dump
The final step is dumping. After the token price reaches a certain point, the scammer will begin dumping a large amount of token holdings, causing the price to drop sharply. From here, investors start to panic and sell off tokens to cut losses and the price will continue to fall. However, the fraudster has sold all the tokens he held, so actions such as cutting losses, DCA... are too late for investors.
Normally, this form occurs mainly in memecoin when the intrinsic value of the token is almost zero, so when the real value of the token reaches 0, there will be no chance of price recovery.
How to recognize pump and dump scam
For projects that intend to pump and dump scams, they often have the following signs:
- Tokenomics is unclear or easy to dump: Tokenomics affects the way pumps and dumps work quite a lot. Users should note that tokenomics pump and dump often tends to divide the majority of tokens for the project and the time to unlock tokens is relatively fast (less than 1 year).
- Anonymous team: If the team behind cannot be found on information pages. Users should be wary of these projects, because the risk of scams is relatively high.
- Suspicious social accounts: For pump and dump scam projects, their social network accounts such as Telegram, Discord... often have more bots than people, with the aim of creating a "virtual community" large enough for investors to use. Invest with confidence. In addition, at account X, pump and dump projects often have very high engagement but do not have large alphas or KOLs following them.
Some questions about pump and dump
Is pump and dump illegal?
Currently, many countries still do not have a legal framework for some forms of fraud such as pump and dump in the crypto market. However, in other financial markets such as stocks... pump and dump is a form of fraud that violates the law.
Can users take advantage of pump and dump to make profits?
Theoretically, users can "buy low, sell high" before the tokens are dumped by scammers. However, this form requires users to have fast transaction speed because most projects pump and dump are both memecoins - tokens that constantly change prices, so that means users need to use bots to speed up transactions.
Is pump and dump in the NFT market?
In the NFT market, pump and dump happens relatively frequently as in the regular crypto market. Typically, scammers will continuously promote their NFT project, aiming for the NFT pre-mint and mint phase to go smoothly and attract as many users as possible. After profiting from the above two stages, the scammer abandoned the project and caused the NFT value to drop lower than both the mint and pre-mint stages.
