Crypto Pump and Dumps: How To Spot & Avoid Them

The cryptocurrency market is still in its relative infancy, and its lack of regulation leaves it open to manipulation from experienced con artists. One of the most common methods is called a “pump and dump scheme”. There are several ways scammers can implement such a strategy, which can make it tricky to spot new investors. Here are the telltale signs of how to spot a crypto pump and dump scheme:

1. Be wary of new cryptocurrencies without a track record.
2. Constant promotion by influencers and celebrities.
3. Aggressive social media promotions.
4. False or misleading announcements.
5. Coordinated buying patterns.
6. A sudden increase in trading volume or liquidity.
7. Unusual price movements.
8. Lack of fundamental value.
9. Strange holding terms.
10. Small market capitalization.
11. Anonymous founders and advisors.

Crypto Pump & Dump & How They Work To Trick You

A pump-and-dump scheme is a relatively common cryptocurrency scam. The crux of a pump-and-dump scheme is price manipulation. A select few buyers that are behind the project (or advisors) will artificially balloon the price of their asset using a variety of tactics. This might include spamming message boards and social media with misleading announcements about the coin, or coordinated buying patterns that make the coin look like it’s naturally surging in price. By building this hype, more and more people will likely experience FOMO and jump on board the token, pushing its price even higher.

However, just when the coin hits its “peak” price, the largest token holders will quickly exit their positions, toppling its value in minutes. As investors see a sudden drop in the price, they scramble to liquidate their holdings before losing too much. This sets off an avalanche of selling until the coin is rendered practically worthless.

It’s worth noting that pump-and-dump schemes don’t always have to occur with new projects. They can pick any random small market cap coin with low volume and easily manipulate its price (if they have enough money behind them). This is why it’s important to stay vigilant for strange price movements and odd activity from fraudulent project developers.

Pump & Dump Schemes Are Prevalent In Crypto

Unfortunately, the cryptocurrency industry is home to a few fairly common scams. Perhaps the most frequently encountered is the pump-and-dump scheme. This exploitative strategy has been around for a long time and is used in all sorts of financial markets, not just cryptos. However, it has become more prevalent in the blockchain industry due to a few factors.

• Crypto often attracts younger, inexperienced investors who are more likely to trade on emotions like FOMO
• The crypto market is unregulated so it’s easier to get away with it
• There is a wealth of low-market-cap coins
• It’s much easier to make a new cryptocurrency than it is to make a new public stock offering
• Pump-and-dump schemes are not necessarily illegal for cryptocurrencies

Examples of Pump & Dump Crypto Schemes

Most pump-and-dump schemes will look very similar when shown on a chart. They start at a very low price during the accumulation stage, as the scammers build their portfolios while starting to work on spreading the hype across media. As the price and volume start to build momentum, the scammers ramp up their hype, continuing to trap new investors as the price starts to balloon.

Once the scammers hit their target returns, they will very quickly sell off their assets, resulting in big red drops indicating high volume and fast drops in price. Legitimate investors may notice this, panic, and try to sell out of their position before it’s too late. Ultimately, when the dump is concluded, the asset’s price will likely mirror what it was during the accumulation phase – practically nothing.

Proven Ways To Spot A Crypto Pump & Dump Scheme

1. New cryptocurrencies without a track record

There can be significant opportunities with investing in new cryptos before listing. However, a crypto token that suddenly starts trending on social media or crypto scanners without any prior knowledge is often a warning sign. Legitimate cryptocurrency projects don’t just appear from nowhere. Developers might spend years performing seed raises, distributing tokens, analyzing the market, and sorting out cash flow before their project ever sees the light of day.

Moreover, few larger-scale businesses would risk going public without performing any pre-launch advertisement, and building a blockchain with viable utility can take quite some time too.

This doesn't mean every random coin without a track record is necessarily a pump-and-dump scheme. Meme coin projects often copy the blockchain code of their peers and provide little value to consumers, meaning they can pop up overnight. However, such assets aren’t necessarily malicious in nature. Even so, investors should be cautious when putting serious money into these kinds of cryptocurrencies, regardless of whether they’re a pump or dump scheme or not.

2. Constant promotion by influencers and celebrities

A coin that comes from nowhere and suddenly sees multiple Twitter and Instagram posts from popular crypto influencer accounts can sometimes indicate a shady project. In the past, individuals would accept money without proper due diligence and blindly promote the coin to their following. Not knowing, the owners intended to use the influencer's reach to increase the price and dump their tokens on the late buyers.

Influencer with 60k followers creates their own meme coin then deletes all tweets and rugs after hyping it up for days. pic.twitter.com/8p9YjCC7ng

— ZachXBT (@zachxbt) May 1, 2023

Of course, legitimate and high-end crypto projects also use a similar marketing strategy. We can differentiate between them by looking out for a few things:

• Pump-and-dump schemes usually involve lots of cheaper, mid/low-tier celebrities (based on account followers) rather than a couple of expensive ones
• Constant social media shilling and advertisement over a short, sharp multi-day period is more likely to be a pump-and-dump scheme
• Coins being advertised as “the next moonshot” or a “guaranteed 10x” – without any mention of actual functionality – are quite likely to be pump and dumps

3. Aggressive social media promotions

Pump-and-dump schemes might use Facebook, Telegram, and Discord groups to relentlessly advertise their coin. Such campaigns will have little to no focus on utility, project developers, or anything technical. They might spam social media groups with messages about the coin being “the next big thing”, and unlike a well-curated page, might be the exact same content copied and pasted over and over again.

An extremely convincing and well-planned scheme might be indiscernible from a real project, but for the most part, the social media activity of a scam coin can be a major giveaway. Particularly if these posts will usually be condensed within a week or two and have spelling or grammar errors.

Alternatively, project developers will nearly always turn to social media to promote their crypto projects. Legitimate projects will usually have a page run by experts who have been in curation for quite a while. Such social media campaigns will typically post things like bug bounties, software updates, pictures of their team, and other useful material.

4. False or misleading announcements

Pump and dumps will often pull out all sorts of strategies to bait people into buying their fake coin. Many of them will create their own social media groups and some will even have an official-looking website. Keeping on top of the posts they make can be a great way to avoid falling for a pump and dump. In particular, be wary of constant delays, promises that seem “too good to be true” (for example, a guaranteed 100% APY on staking the token), or announcements that lead users to dodgy websites.

5. Coordinated buying patterns

While some pumps and dumps are the work of a single fraudster, most major money-grabbing schemes require a large syndicate to manipulate the market. To make the most of their pump-and-dump scam, “project developers” typically need a large sum of the coin they’re advertising at specific price points.

To do this, they will often buy and sell the coin at very specific times of the day/night when the lack of volume can lead to easy price manipulation. Be wary of low market cap coins that seem to only go up (or down) in value at very specific times, as they may be having their price pushed around by inside traders.

6. Sudden increase in trading volume or liquidity

Most pump-and-dump crypto schemes experience periods of extremely high volume and liquidity. This tends to occur right before the scheme is about to climax, as scammers are either trying to accumulate as much as possible or liquidate their position as quickly as possible. The crypto market is very reactionary, and quick price swings can cause holders of a certain coin to panic and make an emotion-based trade.

For example, an investor might have been roped into buying a coin called BLJN. They might see the coin’s price rise by 20% on the back of massive trading volume that the asset hadn’t seen since its mysterious arrival onto the crypto market. Not wanting to miss out, the investor might let FOMO take over and buy another $5,000 worth of BLJN. However, only a few hours later, with the coin having risen another 10%, it begins its freefall to being worthless as major holders begin to exit their positions, while the victims scramble to follow suit.

7. Unusual price movements

Cryptocurrencies are notorious for being unpredictable, largely due to the market’s speculative nature. This can make it a little hard to spot a pump-and-dump scheme based on price movements. But if a coin suddenly begins jumping around in value, especially if it's moving contrary to greater market sentiment, it can be a sign of market manipulation.

However, for the most part, the broader crypto market will only jump/drop in value drastically for a reason. For example, Bitcoin can be unstable at times and might drop 10% in a day, but this might be due to a recession being declared by leading economists, the reserve bank raising interest rates higher than expected, or a similar event.

8. Lack of fundamental value

Generally speaking, investors should always stick to cryptocurrencies with a fundamental value regardless of whether they’re trying to avoid pump and dumps in crypto or not. Most legitimate, blue-chip coins have some form of underlying value and real-world/Web3 use-case that investors are speculating on. On the other hand, pump-and-dump coins will almost always lack any sort of fundamental value. Their developers will typically flaunt the coin’s ability to fly to the moon, how it is creating a loyal community, and other positive price sentiments without ever actually describing what the coin does.

Always look out for a coin’s whitepaper to gain a full understanding of what problem the project developers are trying to solve, and how they’re setting out to do this. To be clear, not all successful crypto projects have started out with fundamental value. The most popular meme coins are often more community-based than they are pragmatic, however legitimate projects in this space will often have a long-standing social media presence and a clear roadmap.

9. Strange holding terms

Certain pump-and-dump transactions require strange holding terms for investors to access the coin. This can take several forms and isn’t always a scam. Several legitimate projects have token vesting contracts that slowly release a new coin to ensure the supply (and ultimately value) remains stable. Such projects usually have official ITO/ICOs with lots of lead-up and several legitimate investors, particularly in the venture capital space.

On the other hand, there are a few situations to look out for. For example, let’s say to buy a new coin, investors are told to lock up the tokens in a smart contract on a decentralized exchange for “x” amount of time, in exchange for staking rewards. However, by the time the contract is finalized and the coins are unlocked, their value is practically zero. This situation is also very common in rug pulls. An easy way to avoid this is to always use flexible staking options on coins outside of the top 50-100 by market cap.

10. Small market capitalization

There are hundreds of legitimate and meritorious projects with a tiny market cap that are real projects in the blockchain sector. However, pump-and-dump cryptos are almost exclusively performed with low-market-cap coins. Less money in an asset makes it much easier to manipulate its value. While a few small-market-cap coins in a portfolio can be an exciting (and risky) mode of diversification, investors should always be wary of spending too much on such assets.

11. Anonymous founders and advisors

It is becoming less and less acceptable for project developers to remain anonymous and act unprofessionally. Most legitimate projects in the modern era will have at least one or two people in the team that is known in the industry or make their profiles public. Alternatively, some may operate under a pseudonym but have a history of working on successful blockchain projects. Anonymous founders and advisors don’t necessarily mean a pump and dump is imminent, but it's much easier to pull off if nobody knows who you are.

How To Protect Yourself From Pump & Dump Schemes

• Do your own research. Never just rely on one source of information, or what a crypto “expert” tells you about a coin. Research the project developer’s background, and assess its tokenomics on CoinMarketCap (or an alternative).
• Avoid FOMO. Pump and dump schemes rely on tricking inexperienced investors into buying into a coin due to emotion. Feeling the fear of missing out while a coin is rushing upwards is common – and is exactly what the scam is exploiting. By avoiding FOMO, investors won’t have to worry about falling for pump-and-dump schemes.
• Use reputable exchanges. This is more common for rug pulls but can also apply to pump-and-dump schemes. Certain fake project developers will require new investors to trade their coins on a specific DEX. This can lead to a “lock-in period,” during which token holders outside of the scammers cannot react to the asset’s inevitable fall in price.
• Avoid thinly traded cryptocurrencies. Cryptocurrency tokens with low trading volume are much more susceptible to price manipulation than those that are constantly traded.
• Buy new coins from reputable launchpads. Many of the blockchain industry’s most exciting and promising new projects are incubated via a trusted launchpad or IDO. Such platforms usually have rigorous requirements for new projects, making them less likely to be scams.
• Beware of social media hype. Pump-and-dump con artists will build FOMO through a few ways, one of the most common being social media posts. Be wary of repeated, copy-and-paste comments on places like Discord, Facebook, Twitter, Telegram, and Instagram.
• Check the source of the promotion. New investors are often baited by a “too good to be true” promotion, either on social media or on a decentralized exchange. Always double-check who is promoting the asset and whether their track record and post history are clean.
• Be aware of unusual price movements. Pump and dumps are essentially a form of price manipulation, which invariably requires unusual price movements. If traditionally low-volume coins suddenly burst to life, this can be a clear warning sign.
• Avoid anonymous teams. Although certain projects deliberately have anonymous teams (particularly privacy coins, DAOs, or DEXs), if they're real, there will still be legitimate documentation and project history. Pump-and-dump schemes will almost always be performed by completely anonymous developers with little to no track record in the blockchain sphere.
• Don’t fall for false announcements. Some pump-and-dump schemes might just lie about some upcoming news for a coin. For example, they might “announce” that a low market-cap altcoin is getting a major upgrade that will make it the fastest cryptocurrency in the industry. Always double-check sources.
• Only invest what you can afford to lose. By always following this rule, investors can mitigate any losses they may encounter, whether due to scams or unsuccessful trades.
• Stay informed and vigilant. The crypto industry is slowly becoming more mature and professional, but it is still in its relative infancy. Investors that are active in the scene must always remain aware of the industry’s current state, as it is still prone to exploitations, and several crypto exchange hacks. There are even some public groups that proudly flaunt which coin they are planning to pump and dump next – giving investors warning on which cryptocurrencies to avoid.

This Is What You Need To Do If You’ve Fallen For A Pump & Dump

As soon as an investor finds out they’re a victim of a pump-and-dump scheme, they should sell the responsible token. If they’re lucky, they may be able to exit their position before the rest of the market reacts, avoiding massive losses or holding onto a worthless coin.

If the victim is too late, they should alert authorities – especially if the amount lost is substantial. There are several bodies that might be worth contacting in this situation, including:

The crypto exchange that was used to buy/sell the asset can pause trading and attempt to pursue wallets that moved large amounts of crypto. The police might not be able to help directly, but they can redirect victims to relevant bodies that have expertise in these kinds of incidents.

Unfortunately, there is no guarantee that the authorities will catch the scammers or reclaim lost funds. In most instances, losses will be permanent. However, by acting quickly, investors give themselves the best chance of being reimbursed and recovering any lost funds.

Frequently Asked Questions