Major Crypto Scams Explained: 'Pump and Dump' vs. 'Rug Pull'
- Written by Will from Holland
- Category: Articles
With cryptos soaring to new heights, more and more newbies are getting into the crypto investing game. That makes the crypto circus very attractive to scammers. Why? Most of these newbie investors aren't aware of the potential pitfalls.
You need to know about these two major crypto scams. You don't want to fall for these!
That's why, if you're a newbie, you need to know about these two major crypto scams. You don't want to fall for these!
But it's important to understand the working of cryptos first.
The Working of Cryptos
The thing with crypto is there really isn't anything backing up the value of it. Dollars are backed by the gold in Fort Knox, for instance. With crypto, there's nothing really there. Prices purely go up or down based on supply and demand. The more in demand a crypto is, the higher the value. And scammers know how to "pump up" demand.
Which takes us to pump and dump schemes!
Pump and Dump Schemes
Pump and dump is a way of price manipulation. It is a tactic mainly applied to cryptocurrencies or tokens with a low market capitalization and low liquidity. The rates of these cryptocurrencies or tokens are easier to manipulate.
A pump and dump scheme unfolds like this:
The scammers behind the pump and dump buy a random cryptocurrency or token cheaply
When they have bought enough of the crypto, they will hype the purchased crypto on social media, often through popular finfluencers (aka financial influencers)
The people who are being reached by this hype think they can get rich by buying the cryptocurrency
People get excited and buy the crypto
Because the cryptocurrency is now hyped and people are buying, the value of the crypto goes up
When the crypto reaches a certain target value, the scammer then sells all their cryptos
This creates lots of supply, and causes the value/price to drop
Many people who have stepped into the pump and dump see the price drop, and also sell their cryptocurrencies in a panic, trying to minimalize loss
The later you stepped in, the more you paid for the crypto, the greater your loss
How do you recognize a pump and dump?
Smaller cryptos are really vulnerable to pump and dumps. A pump and dump can often be recognized by following the price trend of the crypto or token.
In the beginning, the price is relatively low for a while, after which a sharp price rise follows, followed by a sharp fall, creating a sharp peak. The lesson for you: Before getting into a crypto, check the price fluctuations. If there's no fundamental news to justify this price hike, consider it a pump and dump, like shown in the image below.
Next... Rug Pulls!
Potential investors often invest crypto (like Ethereum or Bitcoin) into a token, a new-to-be-developed crypto. After enough seed money is collected, a token usually develops their own blockchain platform (more on that here), after which it is called a coin. These investors hope to gain on their investment after the new token/coin becomes popular.
And that's where rug pulls come in to play!
A rug pull happens when a developer creates a cryptocurrency token with the intent to run away with investors' funds.
Have you heard of the "Squid Game Crypto Scam"? That was a big rug pull. Here's what happened:
A crypto token was developed in the name of the popular "Squid Game" Netflix series. Note that this happened without the knowledge of Netflix or the series' creators
The Squid Game token was listed on a decentralized exchange, a marketplace for crypto that is not controlled by an authorized or regulated service, and then the scammers created a hype
Investors and enthusiasts got interested and started buying the token, driving the price up
- First slowly, then higher and then higher quickly
- The token went from one cent to nearly three thousand dollars, really quickly!
Then, the scammers pulled the plug and took all the invested crypto (an estimated $3.3 million) from the token development, causing the value to plummet and leaving a worthless token and all the investors empty handed
Hello, rug pull
How to Avoid a Rug Pull?
If you want to be safe, always stay with centralized crypto exchanges that are regulated, such as Coinbase, Bitvavo or Binance. You pretty much only invest into existing coins, rather than new tokens (you can still lose your investment though).
Be sure to know the projects that you are about to invest in. Do proper research into the team behind the token. Check the members on Github, LinkedIn and the like. Can't find any info? Stay away from the token!
The Biggest Tip
Investing anywhere, whether you're using regular stock exchanges or crypto, is risky. ONLY invest money that you can afford to lose, and invest safely, starting with this article on learning how to invest.