Scammers attempt to defraud unwary traders through a variety of complex ways in investment circles. The “pump-and-dump scam” is one such approach that is commonly used in unregulated investment markets like as the cryptocurrency market.

Pump-and-dump is a type of financial fraud in which scammers obtain a low-cost coin by market cap, market (or pump) it, and then sell (or dump) it after the price has increased. Since the price has inflated above what the currency is actually worth, once the dumping is complete, the price immediately falls.

Basics Of PUMP-AND-DUMP

Pump:

Scammers or groups invest in a low-value cryptocurrency.

External investors are drawn in by the growth in demand and increased advertising.

Fear of losing out on easy profit drives external investors to hurry in.

Dump:

Scammers sell these coins at grossly inflated prices after the price climbs.

The price of the coin is effected by the unexpected rise in supply.

Coins that belonged to outside investors are now worthless.

Target Searching

Scammers begin the pump-and-dump plan by identifying a feasible cryptocurrency to abuse. Ideal candidates are unfamiliar or newly launched cryptocurrencies (often known to as “altcoins”) with low market capitalizations and low popularity with the general public (or at all). A coin with such little liquidity with low trading volume and inadequate supply and demand. This means that very few people purchase or sell it. Scammers buy a big amount of coins after selecting a suitable candidate.

Pump it up

Inflating the price of the altcoin is partially accomplished by the growth in demand brought on by the scammers’ purchases. Scammers aggressively advertise the coin on social media and other channels to further promote it. The endorsement of well-known people or organizations, regardless of wether genuine or (as might happen) fraudulently projected by scammers, is also essential to the growth of the coin.

An alternate pumping approach is “whale manipulation.” Rather from simply advertising the altcoin, the investor makes a large purchase in order to enhance its trading volume and price by their own efforts. For the unsuspecting trader, this increase acts as extra bait.

FOMO never sleeps

The only remaining strategy for scammers is to exploit people’s inherent greed. When people see an unknown coin rapidly increasing in price, they are prone to want to get on the charging bull. In the world of investing, this process is known as “fear of missing out,” or “FOMO.” Pump-and-dump works because of this fundamental principle.

When is the ideal time to dump?

The moment will come for the scammers to liquidate what they have once a sizable enough number of external investors fall for the hook and the excitement fades away. Scammers think that the altcoin’s selling price has reached its all-time high. After selling their coins at the inflated price, the scammers make a massive profit.

The sudden rise in supply and dip in demand lead the fraudulently inflated price to quickly drop significantly. Scammers dump a large quantity, causing the altcoin’s price to fall. External investors want to sell as well, seeing the bearish trend and realizing that the coin has no inherent value. Unfortunately, it ‘s too late for them. But for them, it’s already too late. Those who missed “the Hogwarts Express” will very definitely wind up with worthless coins.

Stay Away From Scams

It takes effort to spot pump-and-dump scams. Trading chart patterns do not differentiate a pumped coin and a coin whose price increase is legitimate. You should always DYOR (do your own research) and only trade with what you understand whether buying coins at an initial coin offering (ICO) or investing in unknown altcoins.

Before investing, keep an eye open for unusual price surges (anything beyond 80% within a day or two is typically deemed suspicious) and avoid small-cap altcoins. If your cryptocurrency research turns up with no excellent reasons for the price increase, it’s probably because there aren’t any. Keep your distance. Your funds would be better utilized elsewhere. To ensure that our users’ investments are as secure as possible, MX Global has always backed only well-established cryptocurrencies with a solid track record.