Synopsis: This article explains pump and dump schemes in low-cap coins and how to protect yourself from these cryptocurrency scams.
Low-cap coins refer to those cryptocurrencies with fewer buyers and fewer sellers. This limited market participation indicates small market capitalisation of less than USD 100 million. This can lead to low liquidity and high price volatility, making these coins particularly vulnerable to manipulation.
What Are Crypto Pump and Dump Schemes?
Crypto pump and dump schemes are scams where manipulators artificially inflate a cryptocurrency’s price through coordinated buying and false information, then sell at peak prices for profit. This causes the price to crash, leaving unsuspecting investors with significant losses that can wipe out entire investments.To avoid pump and dump, you need to do analysis and research before investing.
These schemes are derived from traditional securities markets, where scammer would target small cap stocks, inflate the prices and then sell it for profit. This strategy is used similarly in cryptocurrency. Manipulation usually happens through social media strategies to create hype.
How do these pump dump schemes work?
Setting up
First, scammers create a public group or channel with lots of members. To make this group large, they advertise on many social media platforms.
Pre-pumping announcement
The scammers mention the name of the exchange where the pump will occur and the specific pairing coin to be used.
The admins of the group will send the countdowns and reminders about the rules:
- Buy fast
- Advertise the pumped coin on social media
- HODL the coin for a few minutes
- Sell in small portions
- Only sell at higher prices
These rules not only serve as components of the pre-pump mechanism but also boost the participation from new members.
The Pump phase
The admins announce the target coin at the scheduled time. They encourage everyone to HODL, causing the prices to increase significantly.
The Dump Phase
When the price reaches its peak point, it slowly drops even if members keep repeating HODL. Then prices then fall dramatically, t causing significant losses for late buyers.
Also Read: Can You Offset Crypto Losses Against Other Income in India?
How to spot a pump and dump crypto scheme?
Analysing the price chart trends
- Unnatural price spikes: If there is an unnatural price increase, it is likely driven by coordinated actions of pump and dump scheme organisers. People mistake this unnatural price increase as a result of genuine developments.
- High trading volume: Watch for unusually high trading volume. This is caused by the group of buyers in the pump and dump scheme. People mistake this as a sign of a strong cryptocurrency due to interest from many traders.
- Low market capitalization: Look out for low market capitalisation. Pump and dump schemes are usually executed on low-cap coins. Low-cap coins consist of fewer investors and lower liquidity. Therefore, the pump and dump organisers need less capital to artificially inflate the price of these coins.
Observing the external factors
- Excessive hype: Pump and dump schemes involve news promising unrealistic returns on social media platforms. These tactics induce people to create excessive hype around these low-cap coins.
- Suspicious social media activities: Some pump and dump scheme organisers will ensure that comments are turned off. This is done to avoid circumstances like negative feedback. If the follower count is huge, but there is low engagement, it is a sureshot sign of a fake account.
- Unverified claims and promises: Pump and dump scheme organisers usually mention claims and promises that are not validated and verified. They don’t have the substantial backing for the claims and promises made to the people.
- Project founder’s reputation: The reputation of the project founder is also helpful in determining if it is a pump and dump scheme. If they ever had previous criminal connections, the chances are they may still engage in fraudulent activities.
Written by Parvati Anilkumar
