Celebrities such as Kim Kardashian and Floyd Mayweather are being sued over allegedly misleading investors to get involved in cryptocurrency as part of what’s known as a ‘pump and dump’ scam. But what are these scams and how can investors avoid them?
Cryptocurrency Pump And Dump Scams
Adam Nasli, Head Analyst at international broker comparison site BrokerChooser stressed:
“Pump-and-dump schemes refer to an illegal manipulation technique when an asset’s price is pumped up intentionally by spreading misleading information. When price is increased substantially, the manipulator dumps its shares to the market, causing a significant price drop and leaving other investors left with worthless assets. Pump-and-dump schemes usually target small, barely known assets as the price of these assets can be influenced more easily due to lower trading volume. Also, pump-and-dump schemes prefer assets with lower regulation requirements, such as OTC stocks or cryptos.
Barely known crypto tokens/projects promoted by influencers are most often super risky and end up with big jumps and falls in their prices. The regulation around this kind of promotion is a grey zone, and the customers should be really careful because the associated risks, like the extremely high volatility, are not highlighted in most cases.
We also experienced that more retail customers rely on information from social platforms and many newcomer brokers started providing social features, like tweeting or liking, on their trading platform, where customers can interact with each other.”
Tips For Avoiding Scams
The experts at BrokerChooser included their tips for avoiding scams:
Be critical about what you see online, social media can be misleading so it is important that you do your research and verify the legitimacy of the investment yourself.
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Don't Rush, Don’t FOMO In A Project
There can be a huge pressure in the crypto community to jump on opportunities as quickly as possible but you should always take your time to do research. Never feel obligated to invest in something because it's what everyone else is doing. If all of a sudden an influential person starts hyping up a new token there is a good chance it's a scam.
Do Your Homework And Check As Many Details As Possible
Learn to spot the red flags of investment fraud. Make sure you are watching the market, get clued up on the information that is being put out there and validate it through a number of sources, such as a whitepaper or a website of the new crypto project. Lacking a website or whitepaper are red flags.
It’s also worth checking the market cap of a crypto project, if it increases steadily or rapidly. The rapid jumps can also be warning signs. If you are able to dig into technical details, you can find information on chain explorers, like volume on that chain.