How to Spot Crypto Pump and Dump Scams
One of the most common schemes in the cryptocurrency world is the pump-and-dump.
This article will help you understand how these schemes work, what signs to watch for, and how to avoid getting caught in one.
What Is a Pump and Dump?
A pump-and-dump scheme is a form of market manipulation in which the price of a token is artificially inflated (the "pump") to create excitement and attract more buyers. Once the price reaches a peak, those behind the scheme sell off their tokens (the "dump"), often causing the price to crash dramatically. The result? Early participants walk away with significant profits, while the late buyers are left holding tokens that are now worth a fraction of what they paid.
Trading chart of a typical crypto pump and dump scam
How Pump and Dump Schemes Work
Pump-and-dump schemes typically follow a pattern that can be broken down into several stages:
Creation of Hype: Organizers of the scheme often start by creating hype around a particular token. This may be done through social media channels, chat groups (e.g., Telegram or Discord), influencers, and even fake news. They make exaggerated claims about the token's potential, often describing it as a "hidden gem" or the next big thing.
Early Buying (Pump Phase): The manipulators, who already hold large amounts of the token, begin buying more, causing the price to rise. This price action, combined with the promotional hype, attracts more investors who fear missing out (FOMO).
FOMO-Induced Buying: As the price starts to rise, unsuspecting buyers jump in, thinking they are getting in early on a promising investment. The increased demand further drives up the price, and the cycle continues.
The Dump: Once the token's price reaches a desirable peak, the organizers start selling off their holdings. This sudden influx of supply causes the price to crash rapidly, leaving most of the late buyers at a significant loss.
Typical stages of a cryptocurrency pump and dump scam
How to Spot a Crypto Pump and Dump Scheme
To protect yourself from getting caught in a pump-and-dump, it's important to know the warning signs. Here are the key metrics and indicators to watch for:
1. Sudden and Unexplained Price Spikes
What to Watch For: A token that suddenly experiences a rapid price increase without any legitimate news or updates to justify the move.
Why It’s Suspicious: If there are no clear announcements (e.g., partnerships, listings, new technology), the price action could be the result of manipulation.
2. Low Market Cap and Volume
What to Watch For: Tokens with a very low market cap and low trading volume are more susceptible to manipulation because it takes relatively little capital to move the price.
Why It’s Suspicious: Manipulators often target low-volume tokens since they can easily create significant price movements with smaller purchases.
3. Excessive Hype on Social Media
What to Watch For: If you see a token being aggressively promoted across multiple social media platforms, especially in a coordinated manner, be cautious.
Why It’s Suspicious: Real projects typically let their work speak for itself. Excessive shilling, especially by unknown accounts, is often a red flag of artificial hype.
4. Lack of Transparency
What to Watch For: Difficulty finding credible information about the project—such as the team, technology, or purpose of the token.
Why It’s Suspicious: Legitimate projects are usually transparent about who is behind them and their goals. If this information is missing or unclear, it could be an indicator of a scam.
5. Coordinated Buy Signals
What to Watch For: Posts or messages in chat groups urging members to buy now to "pump" the token price.
Why It’s Suspicious: Coordinated efforts to encourage buying are a hallmark of pump-and-dump schemes, as manipulators need public participation to inflate the price before selling.
How to Protect Yourself
Do Your Own Research (DYOR): Always take time to research a project before investing. Look for transparent teams, real use cases, and community engagement. If the only thing supporting the token is hype, it’s a major red flag.
Check Trading Volume: Look at the trading volume and liquidity of the token. If a token has a low trading volume and liquidity, it is easier for manipulators to move the price.
Avoid FOMO: Don’t let the fear of missing out drive your investment decisions. If a token's price is skyrocketing, take a step back and assess whether there is any real reason behind it. Avoid acting impulsively based on hype.
Diversify Your Investments: Never put all your capital into one token—especially one that’s relatively new or unproven. Diversifying your investments reduces your risk exposure.
Be Skeptical of "Guaranteed" Gains: No one can guarantee profits in crypto, especially with volatile new tokens. Be skeptical of anyone making promises of guaranteed returns or claiming that a token is going "to the moon."
Do not join Telegram Pump and Dump Groups: There is a reason why these group organizers do not reveal the target token beforehand - to enable them to buy so they can then start exiting as they promote the token to you.
Final Thoughts
Pump-and-dump schemes prey on the lack of experience and the desire for quick profits that are common in the crypto space. By staying informed, doing thorough research, and resisting the urge to chase sudden price movements, you can protect yourself from becoming a victim of these manipulative tactics. Always remember: if something sounds too good to be true, it probably is.