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This article was published on March 15, 2018

How to avoid getting duped by cryptocurrency ‘pump and dump’ schemes (like I did)

How to avoid getting duped by cryptocurrency ‘pump and dump’ schemes (like I did)
Muhammad Farasat Khan
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Muhammad Farasat Khan

Muhammad Farasat Khan is a content marketer. A crypto fanatic by day and a tech enthusiast by night. You can find him on Twitter as @Khanfar Muhammad Farasat Khan is a content marketer. A crypto fanatic by day and a tech enthusiast by night. You can find him on Twitter as @Khanfarasatkhan.

Buy low, sell high; do not follow the green candles, let’s pump until 87,000 Satoshis and dump it at ATH (All Time High). These are just a few notable phrases of the chat groups where hundreds and thousands of cryptocurrency traders gather all together to increase the value of an altcoin.

These types of groups, normally referred to as ‘pump and dump‘ groups, are bringing market manipulation to a whole new level. Nefarious crypto traders use secure messaging platforms like Telegram to orchestrate coin manipulation to make a quick buck — at the cost of less experienced traders. If you’re getting into cryptocurrencies, or just curious about the field, you’ll need to know how pump and dumps work. Otherwise you might up being taken advantage of, like I was.

When I got duped by a ‘pump and dump’

I started trading in cryptocurrency a while back, being a tech savvy person I was quite enthusiastic about the technology. I was entirely unaware of these scams at that point, but I was definitely part of some Telegram and Whatsapp groups where people were on daily basis selecting low-priced coins to turn it into a gem for others to hop on. Since newbies always follow the green candles, it’s easy for more experienced traders to use them for their own gains.

But I didn’t notice this pattern until a certain coin — which I was quite excited about — was about to be launched on one of the largest cryptocurrency exchanges. The coin looked promising and the exchange even tweeted about it. Everything looked great, but then something happened that I’d never experienced before. Right after the tweet, I started observing how the coin started to inflate in value on other exchanges. But what surprised me the most was that the trading didn’t start on the exchange where it was actually about to be launched.

I waited and waited until trading opened, I was hustling to find the right price to jump in. The price was flickering in front of my eyes from $20 to $18 then from $16 to $19, I unluckily grabbed the coin at $18, hoping it would turn into a gem. But I was sorely mistaken because it suddenly dropped to $9, thankfully I lost my patience at the right time and only lost half of my invested coin. Rest remains history and that coin closed at $2 the same day.

What I figured out later was that I had become a victim of a pump and dump scheme. Unfortunately this is happening far too often in the crypto world and mostly happens with small market cap and circulation coins. It’s really hard to actually stay completely safe and not become a victim of these schemes. The only possible defense is understanding how pump and dumps happen and what kind of people are behind it. That’s why anybody who’s interested in cryptocurrencies needs to know how these schemes work.

The process

The process of the whole cycle is quite simple. The group admins gather as many members as they can in these groups and then it naturally grows bigger when both small and large traders join up as a fear of missing out, the lovely FOMO. Once the group reaches around hundred thousand members it can start to actively manipulate the worth of the coin and signal is passed on to the members. I came across a new pump recently that’s an good example of how the members are activated.

The group sent out a message signaling that member were to unite and pump. That day the coin’s worth was around 0.00004340 BTC or 4,340 SATs (Satoshis), and the community united to loot the newbies and pumped it up to 9,180 SATs. And then the traders who went in all together went to the moon bang bang!
This resulted in huge gains for many (the manipulators), but these gains were a direct result of the loss of others. However, despite this there’s also a bright side to these groups. These groups are quite helpful to many members as not everyone is as good with TA (technical analysis).

Hence few those are good with the analysis of charts, which are quite helpful in predicting the next surge in price or the support the coin may get, may provide helpful insights to the traders. But that might actually make it worse as it can make a certain chat look legit, while it’s actually a way to prepare a pump and dump.

These type of groups are not limited to messaging apps like Telegram or Whatsapp, the bigger social media platforms are also used as a medium; especially Facebook, even though Facebook has banned all crypto-currency ads, but the private groups provide a substantial landscape for traders to pump a coin together.

Role of celebrities in pump and dumps

In the era of cryptocurrencies, celebrities hold a powerful position with millions of fans and followers on Twitter, Facebook, and other social channels. One notable example of a crypto celebrity is John McAfee, a British-American computer programmer and the owner of the famous company, McAfee Associates.

His recent activities have earned him the title of ‘John McAfee Pump.’ With 782k Twitter followers, John decided to talk about a coin via his tweet every single day. This resulted in the value of the coin going ATH (All time high), with alleged organizers dumped with the spike.

It somehow went too hot, and he changed it from “Coin of the day” to “Coin of the week.”. This made the entire market unstable with organizers making millions out of thin air.

McAfee is just one bad influencer, while there are some good ones that actually do their research and due diligence — but unfortunately they might be a minority. People trading in cryptocurrencies, the average Joes, are also greatly affected by influencers on YouTube, Twitter and other platforms. But since there’s different type of influencers out there, how can one decide which ones are the quality influencers and which ones are just coin shillers?

Well, there are number of things one should look out for before following anyone’s advice in this volatile market:

  • Look out for the value a vlogger is providing. Is it something that is hands-on that you could apply regularly or was it just a lot of noise or babbling, obviously your time is valuable.
  • Look out for the time a influencer takes to get on to the point. Does he take too long to get to the point or if the information is wrapped up in too much noise? Or does he provide right on spot information, right away to be applied. Is it an hour long of noise or couple of minutes of powerpack.
  • Look out for the transparency, which means the influencer prioritize pre-hikes. This is so that you are not tricked or waved into something that you don’t know what exactly is going on. This for me gives the highest level of trust and makes me comfortable.

And never just follow a single influencer, to stay safe make sure you’re checking out a bunch of quality information providers. You can use the above points but also make sure to do your own research to find legitimate influencers, because their advice is really valuable.

The current state of the pumps and dumps

With such growth, volatility, and manipulation in these currencies, government organizations around the world are waking up and starting to give the burgeoning market the attention that it needs to develop. Recently, CFTC issued an official document giving a heads up to all the users and to lessen the severity of scams and manipulation.

At a Senate hearing this month, CFTC Chairman Christopher Giancarlo was mindful that the regulator was focused on cracking down on manipulation of cryptocurrency markets. The pump and dump has been deduced as illegal and is considered to be securities fraud — which is great news.

Pump and dump groups are definitely not the right way to grow the cryptocurrency ecosystem. With so much volatility, FUD, and FOMO, the technology which has yet to change the dynamics of this century, will strive to achieve acceptance, and we can’t have pump and dumpers ruin that.

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