Anatomy of a Crypto Pump and Dump Scam: Beware of Market Manipulation

Cryptocurrency has opened up a brave new world of financial opportunities, but it‘s also become a breeding ground for scams and fraud. One of the most pervasive schemes plaguing the crypto space is the pump and dump.

In traditional financial markets, pump and dump schemes are illegal. But in the still largely unregulated landscape of crypto, they remain prevalent. A 2018 study estimated that there are two pump and dump scams happening every day in the crypto space, resulting in over $7 million worth of trading volume daily [1].

In this article, we‘ll dissect the anatomy of a typical crypto pump and dump scam, look at some real-world examples, and discuss how you can protect yourself from falling victim to these schemes. As a cyber security expert with over a decade of experience in the field, I‘ve seen countless instances of these scams in action.

How Pump and Dump Schemes Work

A pump and dump scam involves artificially inflating the price of an asset through misleading positive statements in order to sell it at a higher price. Once the operators of the scheme "dump" their overvalued shares, the price falls and investors lose their money [2].

In the crypto world, these pump and dumps typically target smaller, lesser-known coins with low market caps and trading volume. The lack of liquidity makes it easier for a coordinated group to manipulate the price.

The scheme usually unfolds something like this:

1. The fraudsters accumulate a large amount of the target coin ahead of time at low prices.

2. They begin aggressively promoting and shilling the coin on social media, forums, and chat groups. This often involves spreading misleading hype, FOMO, and even false claims about major announcements or partnerships.

3. Unwitting investors start buying the coin en masse, driving up the price dramatically.

4. Once the price has peaked, the scammers dump all their pre-bought coins on the market, cashing in on massive profits.

5. The massive selling pressure from the scammers tanks the coin‘s price, and the regular investors are left holding the bag while the price plummets.

According to a study from the University of Technology Sydney, pump and dump schemes are most commonly orchestrated through two platforms: Telegram (63%) and Discord (25%). The study found 355 cases of crypto pump and dump scams over just a seven month period, and identified 23 pump and dump groups with between 1.5K and 300K members [3].

Scammers will often try to lend an air of legitimacy to their pump and dump groups by charging "membership fees" or requiring payment for their trading alerts/signals. But in reality, only the orchestrators of the scam are in a position to actually profit.

Red Flags of Pump and Dump Schemes

While no two pump and dump schemes are exactly alike, there are some common characteristics to watch out for:

🚩 Sudden, explosive growth in coins with small market caps and low trading volume
🚩 Coordinated shilling across social media from suspicious accounts
🚩 Bold claims of huge profits with little details or transparency on how they‘ll be achieved
🚩 Aggressive marketing using all caps, rocket emojis, etc.
🚩 No clear signs of development activity or progress on the project
🚩 Anonymous team members or lack of info on the developers
🚩 Copycat projects trying to capitalize on hype (imitating popular coins, themes, or memes)

Real-World Crypto Pump and Dump Examples

To help illustrate how these schemes can play out in practice, let‘s look at a few real world examples of pump and dump scams in the crypto space:

OneCoin

OneCoin was a notorious ponzi scheme promoted as a cryptocurrency by Bulgaria-based offshore companies between 2014 and 2019. It marketed itself as the "Bitcoin killer" and promised investors guaranteed returns if they purchased "educational material" packages. In reality, OneCoin had no blockchain or verifiable mining activity. Investigators concluded it raised over $4 billion worldwide from defrauded investors before the scheme unraveled [4].

Save the Kids Token

In June 2021, a group of social media influencers started heavily promoting a new charity token project called Save the Kids on their platforms. High profile endorsers included the Twitch streamer Adin Ross, the rapper Lil Yachty, and YouTubers like RiceGum and FaZe Kay. But shortly after launch, the token price crashed over 90% as developers and promoters dumped their coins on unsuspecting investors. Over $200K worth of the cryptocurrency was cashed out before the project was abandoned [5].

Squid Game Token

In late 2021, a new token called SQUID launched, capitalizing on the hype around the hugely popular Netflix series Squid Game. The token purported to be a "play-to-earn" cryptocurrency that would let holders participate in online games inspired by the show. The price skyrocketed from just over $0.01 to over $2,800 in a matter of days.

However, it turned out the developers implemented "anti-dumping technology" that prevented most holders from selling their tokens. On Nov 1, the developers themselves cashed out, tanking the coin‘s price and walking away with an estimated $3.3 million. The token was delisted from the decentralized exchange PancakeSwap, and the project‘s website and social media went dark [6].

How to Protect Yourself from Pump and Dump Scams

As the above examples illustrate, even projects with seeming endorsements from celebrities or influencers can turn out to be pump and dump schemes. So how can you protect yourself from falling victim? Here are some tips:

1. Stick to major, well-established cryptocurrencies, especially those in the top 50 by market cap. The larger a coin‘s market cap and trading volume, the harder it is to manipulate.

2. Treat all lesser-known altcoins and tokens with heavy skepticism, especially if you see them being aggressively shilled on social media. If something sounds too good to be true, it probably is.

3. Do thorough research before investing in any crypto asset. Look into the team, their track record, the project‘s roadmap and white paper, whether there are any red flags in the token metrics, etc.

4. Don‘t give into FOMO. If a coin has already pumped massively in price, you‘re likely too late. Chasing pumps is a surefire way to lose money.

5. Beware of paid cryptocurrency trading groups, pump and dump groups, or "insider" alert services. Remember, if the information was truly valuable, they likely wouldn‘t be sharing it openly.

6. Practice good cyber security hygiene. Use two-factor authentication on all your accounts, store your funds in secure hardware wallets vs. leaving them on exchanges, and triple-check website URLs to avoid phishing scams.

7. Cross-reference data from multiple sources. Scammers can fake trading volume and prices on individual exchanges and sites like CoinMarketCap. Look at order book depth and check prices across exchanges.

While the decentralized and permissionless nature of cryptocurrency has opened up incredible opportunities, it‘s also enabled bad actors to exploit the lack of regulation. Pump and dumps remain one of the most common scams in the space.

However, by staying vigilant, thinking critically, and thoroughly vetting any project before investing, you can massively reduce your chances of becoming a victim. Stick to reputable projects, don‘t fall for the hype, and always secure your accounts and keys. Be safe out there!