The quest for the next 10x token is a mission many crypto enthusiasts have been on since the dawn of Web3.

Many crypto investors make money by buying and holding coins and tokens, when the price of these coins and tokens increase they sell at a profit.

But be careful. While many have indeed profited from crypto, there are bad actors who are actively seeking to take advantage of this prospect and dubiously separate you from your money. 
According to a report by Chainalysis in 2022 over $5.9B was lost to crypto scams, unfortunately, many crypto investors fall for these scams and fraudulent schemes one of which is pump and dump schemes.

This article will teach you what pump and dump schemes are and how to spot and avoid them.

Also Read: 30 Crypto Hacks Over $30M, Broken Down

What is a pump and dump scheme?

A pump and dump is a manipulative practice in the world of cryptocurrency where a group of people artificially inflate the price of a particular cryptocurrency by promoting it with false or misleading information and then selling their holdings when the token gets to their desired price usually at the peak of the pump, leaving other investors with worthless tokens(holding the bag).

Actors perpetrating pump-and-dump schemes usually target relatively unknown tokens with low volume as these tokens can be easily manipulated.

They initially create or buy the token once they have enough they then create an illusion of high demand by inflating the price they do this mostly by creating baseless hype around the token making it seem like a potentially good investment, which then attracts new investors to buy the token, they then quickly sell their holdings which are usually large, this huge sell pressure makes the price of the token to fall drastically.

This results in the organizers profiting as they use new investors as exit liquidity, meaning they sell their holdings of the token which they bought at a very cheap price to unsuspecting investors whom they misled into buying it.

Pump and dump schemes are illegal in most countries and are considered fraudulent activities but since the world of crypto is mostly unregulated it is unethical, to say the least, and on top of that these bad actors can remain anonymous.

Pump-and-dump schemes can be perpetrated by the creators of a token or by pump-and-dump groups, these groups exist on various social media platforms like Telegram and Discord. 

According to Chainlysis, 24% of newly launched tokens that gained traction in 2022 bear on-chain characteristics of pump-and-dump schemes. 

Over 1.1 million tokens were launched in 2022, but only 40,521 passed the yardstick for traction set by Chainalysis. 

This yardstick is at least ten swaps and four consecutive days of trading following the week of their launch, another criterion set by Chainalysis is a drastic price decline of 90% or more in the first week of trading the new token. 

This could indicate that creators and earliest holders of these tokens dumped the token extremely quickly, of the 40,521 new tokens that gained sufficient traction in 2022, 9,902 which is 24% saw a price decline in the first week indicative of possible pump and dump activity. 

Now in total, buyers not believed to be associated with the creators of these tokens spent a total of $4.6 billion worth of cryptocurrency acquiring some of the 9,902 suspected pump-and-dump tokens identified by Chainalysis. They further estimated that the creators of these tokens made a total of $30 million in profits from selling off their holdings before the tokens’ value plummeted

Let’s take a look at some of the ways to spot this scam and avoid it. 

Identifying a pump and dump scheme

1. Celebrities or influencers advertising a token

This scheme heavily relies on hype and buzz. The project involved aims to make their token trend on social and use celebrities and influencers to do so.

So when you see a celeb that has never for once talked about crypto all of a sudden start hyping a project, be on guard because they might be getting paid to do so.

Some of these projects might even use influencers in the crypto space and some influencers (including Youtubers) in the crypto space might also be behind the project, that’s why you as an investor should be skeptical whenever a celeb or influencer starts showering praises on a token.

2. Unsolicited messages, emails, and tags

You might receive messages from people you don’t know or don’t follow some of these messages might be in your message requests or you might be tagged to tweets or posts by accounts you don’t know these accounts are mostly bots and the messages are always hyping a new token or project promising huge returns.

This includes platforms such as telegram and whatsapp groups, discord, and emails.

Look most times if something is too good to be true it usually is, so always watch out for these types of messages and emails.

3. Look at the charts

To some, this is the easiest way to identify when a token is being used for a pump and dump scheme, if there is a sudden upward spike in the price of a token within a very short period of time without any justifiable or reasonable cause it might be that the token is being used for a pump and dump scheme. 

A very good example is the $SQUID Game coin, named after Squid Game, one of the biggest shows on Netflix. In reality, the coin had nothing to do with the show, but that didn’t stop it from creating a buzz due to how big the show was at that time.

From a few cents, it flew to a peak of $2,800 and fell back to less than a dollar in a matter of minutes.

Those who bought the coin before the surge were trapped with an anti-selling mechanism these malicious “honeypot” code prevents new buyers from selling the token. 

Sadly a lot of unsuspecting investors lost their funds to $SQUID, so taking a look at the charts to see the price action of a token is always key before investing in the token.

4. Assessing the Founder’s background

It is always wise to be skeptical when the founders of a project are anonymous this way you can not run a quick check on them which is always a wise thing to do before you invest in any project, a quick search on google might reveal a lot of information to you. 

Founders who in the past have had run-ins with authorities or were previously involved in dubious projects might have malicious intent. 

Chainalysis found out that because of the anonymity in crypto 445 individuals or groups accounted for 24% of the 9,902 suspected pump-and-dump tokens launched in 2022. The most prolific suspected pump-and-dump token creator they identified launched 264 tokens that fit their criteria in 2022. 

5. Avoid Pump and Dump Groups

If you can’t beat them join them right? The answer is a very big no because the organizers of these groups use members of the groups as exit liquidity. 

They usually do not disclose the particular token they want to use for the scheme to their members until the day of the scheme by then organizers have already bought the token at a very low price so members of the group who buy these tokens are exposing themselves to huge risk. 

6. Use Analytics Platforms

Token Sniffer is a service that scores new tokens on a scale of 0 to 100 (zero to one hundred) based on their trustworthiness and deducts points for any scam-like characteristics. 

But regardless of the token score, it is very important to check for other red flags. 

Closing Thoughts

To me, this is the most important point regardless of how or where you find out about a token it is very important that you do your due diligence and find out all you can about the token before you invest, for how to DYOR  click here.

When navigating your way through the world of crypto is it a must for you to put on your safety seat belt, you should always thoroughly scrutinize whatever it is you are getting into.

Finally take a look at the website, whitepaper, and the community activity of the project. Additionally, check and evaluate their roadmaps, documentation, and use cases anything that’s unrealistic or fishy should be seen as a red flag.

Also Read: How To Get Started In Crypto (UPDATED 2023)

[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]

Featured Image Credit: Chaindebrief

This article was written by Godwin Okhaifo and edited by Yusoff Kim