Pump and dump projects are coordinated fraud schemes that deceive crypto investors into buying falsely inflated tokens. Usually, the miscreants involved utilize hype on social media or other means to entice more investors to purchase these tokens.
One major “dangling carrot” used is the premise the project could be the next big thing in the crypto world. In fact, the project would “change your fortune” or “make you into a crypto millionaire” overnight.
As more investors buy them, their value increases (the temporary Pump phase). Notably, the ones orchestrating these schemes have a prior considerable holding of these tokens purchased at a minimal price.
With the market pump, their holdings gain more value till they reach a preplanned threshold. Immediately, the miscreants liquidate their entire holdings (the Dump) which are a significant fraction of the token’s max supply.
The ensuing surge in the token’s liquidity predisposes the token’s value to plummet, summing up to untold losses for the deceived investors.
While it is crucial for investors to know the right time to buy crypto, it is also important for them to spot and avoid these fraudulent projects that can squander their funds overnight.
So in this piece, we’ll explore some red flags you’ll see as an investor to suspect that a crypto project is a Pump and Dump scheme. Let’s dive in!
#1 Crypto Pump and Dump Project Red Flag: Excessive Hype on Social Media
Too much hype on social media about a crypto project may be a pointer to a pump-and-dump scheme. Sometimes, the entities behind the scenes pay celebrities and influencers to market these tokens on social media.
Interestingly, these celebrities might not be aware that they were paid to be platforms for selling out a scam. And like Binance says, “superstars do not equal crypto experts,” goes to show the lengths these miscreants will go to deceive more investors.
So, one must thoroughly examine a crypto project to make an informed decision.
#2 Red Flag: A Sudden Spike in the Project Token’s value
Rapid elevation of a token’s price is another pointer to screen for pump-and-dump crypto projects. For instance, a token nobody was aware of last week suddenly starts getting huge coverage on social media and the price has multiplied by 5 in a week. Stark Red Flag.
To clarify, the sudden spike through the fraudsters’ manipulations will undergo a sudden plummet. Accordingly, the endpoint price of the token could even be lower than the starting price at the project’s inception.
Besides, it is generally risky to buy high as chances are that you’ll sell low.
#3. Pressure to Buy Quickly
Once you’re under undue pressure to urgently buy a token or “miss out” or “be left out”, that’s a red flag. Notably, scammers employ limited-time offers and time-dependent bonuses to persuade more unsuspecting investors.
It’s a red flag because genuine crypto investment opportunities don’t call for hasty decisions. Pressure to buy quickly points to manipulation.
#4. Lack of Transparency of the Project
A crypto project not providing clear goals and objectives, technical details, management team and developers info, road map and timeline, etc has something to hide. For example, a pump and dump ulterior motive
Such vague project descriptions could with the above red flags point strongly to a pump-and-dump scheme.
In Conclusion
Pump and dump schemes thrive due to the grey area of the laws governing crypto. Therefore, investors must take every precaution to avoid being victims as they can be ruinous.
For every new crypto project you encounter, pause and evaluate. Meanwhile, research each project thoroughly and search for independent reviews on social media.