As long as there’s money, there’ll be people trying to steal it.
The methods used to steal money vary greatly but one common way in the cryptocurrency space
is by way of a pump and dump scheme, otherwise known as a “rug pull”.
Let us take a closer look at How a Pump and Dumps scam works.
Pump and dumps are where a crypto’s price is artificially boosted by an organised group who
purchases a large volume of a particular coin and in turn push the prices up. Once the coin’s
price reaches a previously agreed upon target, a signal is given for the manipulators to sell, thus
selling it at a much higher price and raking in a sizeable profit.
These schemes usually involve influencers who are paid to tell people to buy a particular digital
coin in order to raise its value. Then, once the value goes up, the scammers and influencers
sell their coins and pocket the profits, while everyone else sees their investments lose value.
The scariest part is that these Schemes Are Carried Out in Broad Daylight.
These particular pump and dump schemes differ to other types
of scams in that there’s little to no trickery involved. Instead,
retail traders willingly participate believing that they’ll be able to beat the zero-sum game.
In the stock market, pump and dumps are illegal. One of the most well-known examples of the pump
and dump scams was conducted by Jordan Belfort and his company on Wall Street throughout the 1990s.
While the Australian regulatory body, The Securities and Exchange Commission (SEC) has
outlawed such activities in the stock market, it doesn't yet have similar rules for cryptocurrency.
More worrisome is the fact that Crypto’s Can Be Created Easily.
It’s fairly easy for anyone with a bit of coding knowledge to create their own cryptocurrency.
However, developers of pump and dump digital currencies
are unlikely to build a whole blockchain. Therefore,
be wary of any coin which doesn’t have an accompanying blockchain, like Bitcoin or Ethereum.
How can investors Avoid Pump and Dumps?
Fear of missing out (or FOMO) among traders can create anxiety,
which often leads to a gambler’s mentality.
FOMO can be combated by conducting thorough research. If you see a coin doing the rounds on
social media that’s promising high returns, look into that coin’s whitepaper and its developers.
Bottom Line
The crypto space is moving at an alarming speed. This means that it will take
time for regulators to catch up with this ever-growing technology.
As such, investors must stay vigilant and be constantly learning and researching because
as long as there’s money, there’ll always be someone trying to steal it. Be vigilant. Be smart.