Hello Steemians,
As we know there are alot of different scams going on here on Steemit - I recently wrote and article about the phishing scams, and what you can do to protect yourself here. Today I thought I would do some research on pump and dump scams, and what investors can do to protect themselves
What are pump and dump schemes?
At the most basic level, pump and dump schemes are where the price of an asset is artificially increased (pumped) in price, usually either by larger investors pooling their money together and buying at the same time or by creating misleading and often false information about an asset. These same investors then sell (dump) these assets and investors lose their money. These are often well coordinated, where the investor work together, agreeing on a price to buy and sell.
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Pump and dump schemes are nothing new, and have been around for decades in the stock market. The reason pump and dump schemes have been so successful in the crypto space recently is because they take advantage of people's greed, ignorance and FOMO. Moreover, the crypto market is largely unregulated so it makes it a much safer haven for potential scammers.
In the crypto space, generally what is happening is a large group of investors buy large amounts of smaller know coins (often referred to as ‘shitcoins’) at a low price, and then advertise them all over social media and paid news sites as the next big thing which would help to inflate their price. The reason they choose lesser known coins is twofold -
As these coins are relatively unknown it is easier to generate fake news to help the pump and encourage people to invest
New coins have a lower market cap, and thus make them easier to massively inflate their price and generate bigger rewards for the pump and dumpers.
Once more innocent investors jump on board, and the price gets to a certain point, the initial investors sell all their coins, and take profit and then leave the innocent investors at a huge loss.
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In late 2017 it seems like just about every coin was going up at crazy rates - and this led to the snowball of FOMO as more and more people heard about cryptocurrency and wanted their piece of the crazy profits they had seen people making. This created the perfect opportunity for these pump and dump schemes, as new investors flocked to the market, alot of whom had no idea about the crypto market and would be easily convinced that any coin had potential to make huge profits.
Furthermore there are over 1500 altcoins, and who knows how many new ICOs in the pipelines - which makes it easier to hide pump and dump schemes. Although there are alot of legitimate start ups, it can be hard even for a seasoned investor to find and separate the legitimate companies from the scammers
How to spot pump and dump schemes
The key red flag when investesting is when a relatively unknown coin makes massive gains for apparently no reason, and over a very short time period. The crypto market is a complicated machine, but when prices legitimately change it is for a reason - changes in regulations, new announcements from the team etc. If you do further research and notice no reason for a sudden massive spike in price then you should be very wary. You can check out the trade volumes on price changes on coinmarketcap.
Bravenewcoin.com also suggest that seeing paid for news articles about a small cap coin in combination with a surge in social media activity could be signs that the coin is being pumped.
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Other things to look out for are - does the coin have an official website? If not this is alarming. Often these coins have professional looking websites, but details are often very vague, for example ‘XYZ coin will revolutionize banking through digital tokens’. Does the company have a prototype, or working product or is it all just speculation? Does it have a solid white paper?
Why the ban on crypto advertising is a good thing
In the last few months there has been many changes within the crypto space, with Facebook, Twitter and Google all banning advertising of ICOs on their platforms. Although this has had a negative effect on the price of Bitcoin and the crypto market I believe it is a good thing.
Why?
These social media platforms are one of the key avenues in which scammers use to shill their coins. Often people who are new to the crypto space will see these and invest. Without these advertisements people who are interested in crypto will have to go out and do more research, rather than have a whole lot of different coins being offered to them right on their newsfeeds. It is definelty a bold move by these giant companies, but I think it will make it much harder for the scammers.
The downside is that legitimate startups also can now not advertise through these means.
I hope this has been helpful - and if in doubt then think of the old saying:
If it's too good to be true, then it probably is
Thank you for reading, and I encourage any discussion or feedback on this important topic.