The pump and dump scam in Web3 manipulates cryptocurrency prices through coordinated buying and misleading information and hype to attract investors, followed by a massive sell-off of tokens, rendering them nearly worthless.
The decentralized anonymity and around-the-clock unregulated trading make the industry particularly susceptible to these manipulative investment scams.
Pump and dump schemes are divided into four stages: the pre-release of tokens, hype during the release, price inflation through buying behavior, and the orchestrators coordinating sell-offs to profit.
You can protect yourself from pump and dump schemes by avoiding unsolicited investment advice, being skeptical of social media ads, and steering clear of plans that promise unrealistic short-term returns.
Coordinated pump and dump scams have plagued the Web3 ecosystem and cryptocurrency markets for years. Often described as the Wild West of the digital world, the temptation for quick profits always attracts those looking to manipulate investments at the expense of others who believe in unrealistic promises.
As regulations continue to catch up, combined with the industry's decentralized design, these scams often evade the attention of law enforcement. However, recent efforts indicate that Web3 is no longer immune to regulators. For example, in October 2024, the token mirror operation led to the seizure of $25 million and the indictment of 18 individuals.
In this article, you will learn about "pump and dump scams," including their definition, how they operate, and how to protect yourself from these complex manipulation strategies.
A pump and dump scam refers to the deliberate manipulation of cryptocurrency or blockchain asset prices. This is achieved by coordinating buying and misleading information to inflate the market price of these digital assets.
Once the scam leaders reach their desired price, they initiate a fierce sell-off to profit. This results in all other investors holding severely devalued or worthless tokens. The phrase refers to the process of "pumping" the token price and then simultaneously "dumping" the tokens and the price. Since these assets often have little to no value, the price never recovers, leaving naive investors trapped.
The decentralized design of Web3 makes it a fertile ground for such market manipulation. Typically, token creators and project developers hide behind the anonymity of the internet and use privacy-focused communication channels like Telegram. This makes it difficult for investors and authorities to hold the deceivers accountable.
Moreover, the market can trade around the clock without specific regulatory oversight or circuit breakers. Platforms like Pump.fun make it easy to create tokens, with over 1 million tokens launched in 2024, further exacerbating the problem.
Did you know? Insiders of pump and dump scams often gain over 100% profit in a single event, with top cases exceeding 2000%.
Pump and dump scams in Web3 typically follow four stages: pre-launch, launch, pump, and dump.
Pre-launch: Initially, hype is built around a new or relatively low-priced token. This is achieved through presales and community building on platforms like Telegram, Discord, and X.
Launch: Promotion enters a new phase, often involving promoters like unsuspecting influencers to increase visibility and attract more excited investors.
Pump: Misleading or false news is spread within the community about potential significant price increases or business partnerships. This causes the market price of the token to soar, with people pouring in more funds while driving demand to its peak.
Dump: When the price manipulation of the Web3 token reaches a profit level attractive to the orchestrators, they will sell off their held tokens in large quantities. The massive sell-off leads to token supply greatly exceeding demand, causing prices to plummet. Investors holding the tokens are unable to sell before the token value nearly disappears.
Did you know? Some tokens may become targets of repeated pump and dump attacks. According to a study by the University of Bristol, the most frequently attacked tokens were targeted 98 times over four years.
Distinguishing between Web3 trading manipulation strategies and enthusiastic yet legitimate investment opportunities can be challenging. The potential returns from getting in early on the next big legitimate crypto token provide perfect cover for illegal decentralized pump and dump operators.
Here are ways to identify potential fraud and coordinated crypto pump groups:
Be wary of unsolicited investment advice: If a stranger contacts you on social media or messaging apps and quickly shifts the conversation to "surefire" investments, be cautious. It's best to remain skeptical and not engage.
Crypto social media ads: Social media platforms are rife with investment ads promising high returns. They may appear to be legitimate companies, even using fake media to deceive investors. Be particularly wary of high-profile celebrities who seem to be promoting Web3 projects. Manipulators often create deepfakes of celebrities without permission or support.
Conduct independent research: Don't be swayed by "now or never" investment opportunities. Always take the time to research projects. You should know about the founders, developers, track records, and company information. If this information is vague or insufficient, it's best to avoid investing.
Diversify risk: Be cautious of promises of high returns with low risk in the short term. Certainly, do not invest the majority of your funds into any single investment; instead, spread your funds to mitigate risk and save yourself from losses in Web3 crypto market manipulation events.
Related: How to Use Google Gemini to Enhance Cryptocurrency Trading Decisions
Original article: “How Fake News and Deepfakes Drive a New Wave of Cryptocurrency Pump and Dump Scams”
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