Beware of Pump and Dump Cryptocurrency Scams

If you spend any time in the cryptocurrency world (more now that the market has risen so dramatically), you’re undoubtedly going to run into some pretty unbelievable claims. There are people running around talking about how they made a 1000% return in a couple of months and how Ripple or Dash made them overnight millionaires.

Because of these claims, you may begin to believe that there are ways to make money quick in this area and, if you’re lucky, that’s true. But as the market grew, many scammers began to move into the space and start making incredible claims. If you’re unseasoned, you may believe that these claims, while incredible, are just as true as the 1000% investment return.

In this series, we will identify common cryptocurrency scams, how people fall for them them and how to identify them easily. Today, we will be taking a closer look at Pump and Dump cryptocurrencies.

What is a Pump and Dump Scam?

A pump and dump scam is a particular type of market manipulation scheme to quickly raise the price of a currency and sell during the peak of the hype. For very large cryptocurrencies like Ethereum or Bitcoin, it’s nearly impossible for one user to manipulate the market. However, there are hundreds of actively traded cryptocurrencies with valuations of under $5 million. In these cases, it’s easier for people to get a significant amount of the currency to start manipulating the market.

How Do Pump and Dump Scams Work?

The Setup

Like all good market manipulations, there needs to be a group of insiders orchestrating the event and purposely misleading people to buy while they sell. One very common way to create a group of insiders is to create a ‘Pump and Dump Group’.

Pump and Dump groups are any semi-private channel (such as Slack or Telegram) that allow a group of users to plan away from the public eye. You can occasionally see them promoting their groups on more public channels like Reddit, but generally the insiders don’t promote until later. While together, one ring leader (or leaders) will pick a cryptocurrency as their mark and quietly buy up a large amount of the cryptocurrency while the price is low.

The Pitch

Once the insiders have their share, then they get loud. Incredibly loud.

They’ll start promoting the currency by saying the technology has true potential, that they have some special feature no other cryptocurrency has and, boom, the price is rising! Users outside of the inner circle will begin to take notice and purchase the cryptocurrency. Because the price starts so low, it does not take a ton of activity to cause the price to jump up quickly.

The valuation of these cryptocurrencies will go from $5 million to $50 million in a few days, causing the market to temporarily go ballistic. Many other users will start promoting the cryptocurrency themselves on their blogs and social channels, bringing even more credibility to the sudden rise in value.

The Payoff

It’s around this time that the insiders (and again, there always need to be insiders) start to quietly sell off while ferociously telling everyone else to sell. After the insider group made their 10X return, they often quietly fade away while the market continues to buy.

Then, just as quickly as the price jumps, it falls. Many users who bought at the peak (called bag holders) will often be left holding a cryptocurrency with declining value. These buyers are are the true targets of these pump and dumps, the users who will pay 10x to the insiders for a cryptocurrency that is actually worthless. And once the price rises and falls, will almost never return in value.

How Can You Spot a Pump and Dump?

The reason many users fall for pump and dump scams is because making a massive 4000% return is not unheard of in this space. Ethereum, from January to June, made exactly that level of return. However, there are some key difference you can spot before you invest in something worthless.

Long Periods of Inactivity Followed By A Sudden Spike

It’s not uncommon for a cryptocurrency to get a huge spike in price, dwarfing whatever market existed for the cryptocurrency before. However, pump and dump cryptocurrencies are almost dead (very little trading) for an extended period of time before getting a huge spike in price.

As an example, here is a graph of Ethereum in the months leading up to it’s sudden price increase:

Ethereum price history

Even though the spike that is about to come dwarfs the activity seen here, there is a fairly active market, with natural highs and lows.

Compare this to ChainCoin, a known pump and dump cryptocurrency in it’s months leading to it’s sudden rise in price:

ChainCoin price history indicates pump and dump

There’s almost no activity to speak of before the July 8th price increase. Ethereum had an active market that grew in size, whereas the ChainCoin has almost no market, then a sudden burst of activity.

This is one of the telltale signs of a pump and dump cryptocurrency.

Very Little Social Presence Outside of One or Two Channels

It’s hard to find good cryptocurrency resources if you’re new to the industry. However, after some digging it’s likely that you’ll find many communities spread across channels like Reddit, Telegram, Slack and even IRC. Even smaller cryptocurrencies like Nexus (a blockchain you’ve likely never heard of) has thousands of users on Slack, Reddit and Twitter.

This will not be the case for Pump and Dump cryptocurrencies. The insiders will usually have one channel (telegram group, slack channel, youtube channel) and users on other people’s channels talking about the cryptocurrency. Because the group is so new, there won’t be time to grow a presence among a larger number of channels. So while there may be a lot of activity among this one group, the information among other channels will be minimal to nil.

If you’re discovering that you can’t find information about your cryptocurrency in other social channels, that’s a sign that the group hasn’t existed for very long.

Immediate and Ferocious Condemnation For Questioning The Cryptocurrency

Cryptocurrency users are not known for their humility, but even in communities like the Ethereum subreddit and the Bitcoin Forums, there is a healthy amount of debate and arguments. However, Pump and Dump groups rely on hype from their users, so even one dissenting opinion can derail the train. In these cases, insiders will attack dissenters, calling them whatever names they can to get them to leave.

If the popular users of a pump and dump group cannot have an honest discussion about what their investing in, that’s usually a bad sign.

Conclusion and Resources

I’ll end each of these posts with the same statement: the root of people investors falling for scams is the Fear of Missing Out. Nefarious users prey on people’s belief that they are going to miss the boat to riches and this is their one opportunity to make a fortune. If you are calm, tempered and willing to wait, these scams will have no power over you.

Read more on Pump and Dump cryptocurrencies here:

  • Timeline of CoinChain pump and dump (great details)
  • Recent Pump and Dumps

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