How a “pump and dump” works and why it is so dangerous in crypto (CryptoScam #4)
A “pump and dump” is a fraudulent scheme in which the organisers cheaply buy a little-known cryptocurrency or NFT, artificially drive its price up through promotion and sell everything at the moment of greatest interest. The price then collapses and the loss is borne by those who bought last. In the fourth episode of our CryptoScam video series (in Czech), we show how the scheme works, why it is so dangerous and how to recognise it.
Summary
- The scheme has three phases: buying and inflating the price, euphoria among new buyers, mass selling by the organisers.
- The targets are usually thinly traded tokens and NFTs whose price can easily be moved.
- A typical tool is promotion via influencers, YouTubers and social media groups.
- Manipulation of the crypto-asset market is prohibited in the EU by the MiCA regulation.
How a “pump and dump” works
- Pump – the organisers buy a large amount of a little-known asset and start promoting it loudly. Often with the help of well-known personalities or YouTubers who “recommend” buying.
- Euphoria phase – the public sees the price rising fast and joins in, hoping for quick profit. Each new purchase drives the price higher.
- Dump – when the price peaks, the organisers sell en masse. The price plummets and new investors are left with big losses.
Why it is so dangerous
- Manipulation – the scheme exploits the lack of information and oversight in smaller markets and enriches the organisers at the expense of new investors.
- High risk of loss – anyone who buys at the peak often loses most of the money invested within minutes to hours.
- Damage to trust – scams tarnish the reputation of the whole cryptocurrency market and hamper its healthy development.
Cryptocurrencies and NFTs
Pump and dump is not limited to cryptocurrencies. It is increasingly appearing on the NFT (non-fungible token) market as well. The organisers use the media and social networks to spread their messages and lure new victims.
The role of influencers and YouTubers
One of the reasons these scams work is promotion by well-known personalities with great influence over their audience. Not every recommendation is a scam, but be careful and critically assess who is advising you to buy and why – and whether they are being paid for it.
How to spot a pump and dump
- An unknown token suddenly rises by tens to hundreds of per cent without any news about the project.
- Suddenly there are lots of posts around the token with slogans like “last chance” or “going to the moon”.
- You are urged to buy “right now” and put under time pressure.
- The token has low trading volume, a small market capitalisation, or is only available on little-known exchanges.
- A Telegram or Discord group promises “signals” with a predetermined time to buy.
You will find similar patterns in other scams, for example AI trading or pre-orders of non-existent miners.
What the law says
In the European Union, the crypto-asset market is governed by the MiCA regulation, which among other things prohibits market manipulation and the spreading of misleading information about crypto-assets. Organisers of a pump and dump therefore face penalties. However, you usually won't get back the money you lose in one – the best protection is caution.
Conclusion
When investing in cryptocurrencies and NFTs, be cautious and well informed. A pump and dump is just one of many risks, so watch out for warning signs and do your own research before every investment. You will find the details in our video – and if this article has helped you, share it so that more people learn about the risks.
What next
- Fake software wallets – the first episode of the CryptoScam series.
- Guide to the world of cryptocurrency – market cycles, buying strategies and risks.
