You must have heard about pump-and-dump schemes in news media outlets, particularly in the crypto world. And you must be wondering what this pump-and-dump scheme is.

If you are new to crypto or wish to invest in crypto, then in this article, we will guide you on one of the type of crypto scams called the pump-and-dump scheme and how to spot it and avoid falling victim to it.

What are Pump and Dump schemes?

Pump and dump schemes are a dime a dozen in the crypto market; they were first used in traditional financial markets, but over time, such schemes have found their way into the cryptocurrency market.

Scammers will promote a particular tangible financial asset while misleading their audience. Once the price of the tangible asset has appreciated at a particular price, these scammers will start selling off their assets while their audience is holding them or, in some cases, keep on investing further.

At the end of the day, these scammers will make a substantial amount of money while these poor audiences are victimized, as the price of that particular tangible asset has lost its worth.

How do pump-and-dump schemes work?

Scammers will entice their audience into believing that they are successful financial gurus, and their audience has to believe in them. Scammers will weave a web of lies about their success, pulling more and more victims into their trap.

Scammers know that as the days roll on, as a common person, it is challenging to bring food to the table. With the current economic market scenario, outcomes are looking bleak. Many are trying to upgrade their style of living but cannot and have to find refuge in multiple jobs.

With such a bleak scenario, many try to search for alternate sources of income. Although many who are drawn to such scammers feel a genuine pinch in their wallets, most fall for them out of pure greed. And scammers have mastered human behavior and psychology.

Scammers will promote themselves on social media platforms with fake lies about making quick money with less risk and hardship. Most of these scammers are crowd-pullers, attracting many toward themselves.

There are two methods by which scammers pull this trick:

Financial Advisor

Scammers will impersonate a financial advisor, and they will manipulate their target audience by showing how much they have invested in cryptos and what their current holdings are.

In reality, such scammers will possess little knowledge about the crypto market. But after witnessing their success online in a video or a live stream, many start believing in them.

These scammers will start sharing and revealing their successes. They will pick up a cryptocurrency that is not popular in the mainstream. They will try to label this cryptocurrency as the underdog and convince their followers that this cryptocurrency will "moon" (a cryptocurrency term to appreciate) in the future.

They will even state that they have an insider tip that guarantees the success of the cryptocurrency in question.

Scammers have already bought these cryptos before they start promoting them to their audience. Scammers buy these cryptos a lot at a cheaper rate compared to what their audience will buy in the future. Thus the term "pump," since they are promoting a crypto that no one has heard of or knows about in detail. 

Due to demand and supply, the price of this particular crypto will start to surge. They will confirm to their audience that, as anticipated, the price of that crypto is increasing. With such statements, the blind faith in these scammers is further cemented. Scammers know that the price of these cryptos will rise to a certain point. Once the price is near its peak, scammers start to sell or "dump" these cryptos.

At the end of the day, scammers have made a lot of money at the expense of their audience. These audience members who have taken these "investing tips" and bought those cryptos end up with worthless crypto.

Cryptocurrency developer

There was a time when the price of Bitcoin was trending at mere cents. Many investors and traders overlook the price potential, thinking that it is a waste of time and money. However, in recent years, the price of Bitcoin has started to surge, and the same Bitcoin hit an all-time high of roughly $70,000.

A fantastic opportunity was missed, and many investors and traders lost out on a substantial amount of money. The fear that they missed out on such a grand, once-in-a-lifetime opportunity to become millionaires was missed.

Now that the time has come, any opportunity to make a quick buck has been engraved in many investors' and traders' minds. And given the current economic turmoil, this desire has been further increased.

Scammers have good knowledge; they also know that people are hungry to make huge profits and are willing to pay for them.

Scammers will release a white paper, a technical paper, which is required to state the reason behind creating this crypto and how it will revolutionize the entire crypto world. Many scammers boast that it will be the next Bitcoin.

Many are not from technical backgrounds like computer programming and do not understand how technology works or will work. They take the words of these scammers for granted.

Scammers know that creating a cryptocurrency requires a lot of money. The amount of money required is quite huge, and instead of going to a financial institute, it is generally collected through crowdfunding.

Thus, scammers will claim that they have the answers to solve the tethering problems that are currently facing the crypto market. To make the transaction safer and faster, they will pull people towards them and request that they support this crowdfunding.

Now two more scenarios come into play.

Pump and dump

Scammers will create a cryptocurrency and promote it; once the popularity has increased to a huge level, the price of this cryptocurrency also increases, and then these scammers will dump all their cryptos.

For example, the popular Korean drama Squid Games aired in 2021 on Netflix. It had taken the entire globe by storm. It was so popular that scammers smelled money and created "Squid," a cryptocurrency, and its price was trending in mere cents and reached an all-time high of roughly $3,000.

Thus, scammers sold all their Squid tokens and made a huge amount of money; a rough estimate of $3 million was lost to this pump-and-dump scheme.

Fake coin

Scammers will promote a cryptocurrency, promising its potential on paper. They will go for crowdfunding, which is popular when creating and releasing an ICO, or Initial Coin Offering.

They will collect all the money from crowdfunding and then disappear for good.

For example, Logan Paul, a social media influencer, ripped off his followers twice; once he planned to release "Dink Doink" and did not deliver the promised cryptocurrency.

He pulled the latest scam by promising his followers a crypto-based game called Crypto Zoo. Even this time, he has not delivered the promised crypto game. After getting backlash from his followers, he again promised to pay back the amount invested by them, but as predicted, he did not deliver on this promise either.

Government initiatives

Many lost their savings in various crypto-related scams. Many lost them to social media influencers.

The United Kingdom undertook a positive initiative, and the Financial Conduct Authority (FCA) has warned that any social media influencer should stay away from providing any financial advice; if they do, and many lose their money in the process, then they can face a hefty fine, incarceration, or even both.

Final thought

If you wish to invest and explore possibilities to make a substantial profit, then avoid taking any financial advice from a layperson. It will serve you best if you approach a certified and regulated crypto broker or brokerage firm and get all your queries and questions answered.

Since cryptocurrency is a financial asset, there are chances to lose your money; thus, only invest and trade in cryptocurrency that you are willing to lose.