What Are Crypto Pumps-and-Dumps?

A crypto pump-and-dump is when conspirators spread misleading news or information regarding a specific cryptocurrency that leads to an increase in the price of that currency. These conspirators then use this price increase to sell the currency at a high profit.

A pump-and-dump also happens when a coin’s collaborators, founders, or a bunch of traders spread incorrect or misleading information regarding the currency in order to inflate its price, and then sell the currency off for this higher price. 

This dumping of the coin then leads to a crash in price, which leaves the new purchasers with little more than a bag of worthless digital currency, creating significant and often irrecoverable losses. 

How Do Pumps and Dumps in Crypto Work?

Pumps and Dumps in Crypto numbers

Creating a crypto requires one to create a whole blockchain system, which demands a great deal of time and skill. However, if you are well-versed in coding, you can use an existing blockchain (such as that of Bitcoin or Ethereum) to design your own coin. 

It is possible to create even billions of such coins and they cost close to nothing. Once you have created the coins, all you need to do is persuade enough investors into purchasing these ultra-cheap coins. This persuasion can be achieved through social media platforms, Discord channels, or even by teaming up with influencers that promote the currency in exchange for their own pile of coins. 

Now, let us assume that the scammers have developed a billion coins, with each coin costing $0.00001. In other words, one billion of such coins cost just $10,000. Now, if the scammers can create enough hype to even shift the price of a single coin one decimal place to the right, it will take the value of their coin trove from $10,000 to $100,000. If this stash of coins is dumped too quickly, it will then lead to a sharp and significant dip in price. 

Examples of Crypto Pumps-and-Dumps:

According to a study conducted by the Stockholm School of Economics and the University of Technology Sydney, 355 instances of crypto pump-and-dump occurred during just the first seven months of 2021. Below are a few examples of these scams:

Example 1 – SaveTheChildren

In July 2021, four FaveClan members took part in a pump-and-dump scam for a digital coin. This coin, named ‘SaveTheChildren’, was heavily hyped and pushed to the Clan’s followers. Once the coin’s price started to go up, these members started selling off the coins that they were given in exchange for participating in the scam. These scammers ended up making a profit of approximately $30,000. 

Example 2 – SafeTrade:

Early in 2022, the coin SafeTrade was marketed as being ‘rug-proof’. Once investors started purchasing the coin, the investors sold off their stacks, leaving the other buyers in the dust. 

Example 3 – EthereumMax:

Yet another example of a crypto pump-and-dump involved renowned celebrities Floyd Mayweather and Kim Kardashian. Kardashian and Mayweather hyped up the coin EthereumMax in order to increase its price. Once the public was lured into buying and the price of the coin went up, EthereumMax executives sold off their share of coins for a hefty profit, leaving the investors with a currency worth close to nothing. In January 2022, EthereumMax investors filed a class-action lawsuit against the company –the lawsuit asserted that Mayweather and Kardashian were part of the scam, and used their popularity and influence in order to trick people into investing in the coin. 

 Tips to Avoid Being a Victim of Crypto Pumps-and-Dumps:

  1. Remember to be mindful of FOMO and not fall into its trap– you might think that every crypto investor is becoming rich, but that is certainly not the case. 
  2. Do your homework – go through the ICO (Initial Coin Offering) whitepaper to learn more about the coin, the people who have created it, and the objective behind this creation. 
  3. If you find that a few people are trying too hard to hype up a coin, there is a fair chance that they are part of a scam. 
  4. Be careful of influencers who start talking about cryptocurrencies virtually overnight. 
  5. When investing, never put up more money than you can afford to lose. 

Final Word:

 Unfortunately, the Securities and Exchange Commission has yet to implement any safeguards against cryptocurrency pumps-and-dumps. This means that education, awareness, and information are your best safeguards against such scams. We hope that this guide helped you learn more about pumps-and-dumps in the crypto space, and how you can protect yourself.