Recently, Kim Kardashian, an internet veteran, and a fashion mogul got slammed with a fine of $1.2 million for not disclosing that she was paid to promote a crypto asset called ‘Ethereum Max’ on her Instagram account.
While that sounds shady enough, what’s more interesting is that the digital asset ‘Ethereum Max’ shares its name with the second biggest cryptocurrency by market cap – Ethereum.
Apart yet from the name-sharing, Ethereum Max shares no association with Ethereum. In fact, it turns out that Ethereum Max was a pump and dump scheme, something that Kim Kardashian and her following of 300 million people fell for.
However, rather than debunking the credibility of Ethereum Max, we will talk about something more important, something that a significant amount of investors over the last few years have fallen for – crypto pump and dump schemes.
What are crypto pump and dump schemes?
One thing about any financial body is certain – if there’s money, there’s a scope of fraud.
Although the crypto industry is a relatively new field of assets, it has witnessed its fair share of frauds and scams. From insider trading to rug pulls, there’s a lot that could go wrong in a public market.
The same is the case with crypto assets with pump and dump schemes.
Understanding a pump and dump scheme is simple – mislead people into thinking an asset in the form of investment has great potential when in reality, it doesn’t.
Due to the influx of investments in the asset, the prices skyrocket for a while. Amidst this, the scammer(s) sell however much they have purchased of this asset, leaving behind people that have invested their money in these assets.
Crypto pump and dump schemes have become surprisingly popular in the last few years. Being an easy way for scammers to pump an asset with the help of an endorsement from a celebrity, these scams have significantly contributed to the negative reputation of crypto assets in general.
Especially with the ability to be bought anonymously, it’s hard to exactly find out who’s the mastermind behind each infamous pump and dump scheme.
Ethereum max in this case also became a prime example of a pump and dump scheme when they reached out to popular personalities like Kim Kardashian for paid promotions to pump their price. And once enough people hopped on the hype train, they decided to sell off their holdings, leaving the people with nothing but pennies.
The easy way in (and the easy way out)
One of the most efficiently orchestrated ways to create hype around an asset is to back it up with celebrity and social influencer endorsements.
Most importantly, these endorsements involve money for these influencers, all the reason enough for you not to fall for them.
As investors purchase these tokens at inflated prices, the people with the most holdings sell out.
These pump-and-dump schemes promise false narratives and guarantee immeasurable returns. And if you have ever earned even a single penny, you’d know that money doesn’t come easy.
How to recognize crypto pump and dump schemes?
While there are countless ways scammers could use to portray an asset as one of the most credible things out there, there are still some ways you could identify pump and dump schemes.
1. Aggressive advertising campaigns
Emotional investing is an infamous method of investing most investors have regretted. But how could you blame most people when an asset is advertised in such a way that it seems nothing but promising?
When these new technologies are created, the owners (a.k.a the scammers) spend a lot of money on product development. Being funded by venture capitalists, they don’t worry about marketing – they don’t have to.
Bootstrapped companies resort to non-stop promotions across their social networks and aggressive ad campaigns to get as many people as possible on board to buy the asset.
Since there’s hardly any market cap, it’s fairly easier to understand that this hype train is leading nowhere but a dead end. Terra Luna is a testament to this.
2. Endless celebrity endorsement
Why does a celebrity across social media talk about a product in the first place?
Money, right? They get paid to talk about products. Brands pay celebrities to endorse their products to a huge audience.
Now, why would a celebrity suddenly decide to ‘vaguely’ suggest to you an asset or technology to invest your money in when they are well aware that it’s a federal crime? Again, money!
Most celebrities and social influencers hide behind the #notfinancialadvice, when in reality, they know that a significant portion of their audience is blindly following their advice. What’s surprising is that in most cases, these celebrities don’t even understand the crypto markets well or aren’t even associated with the company itself. And since right now there are no regulations in place, it’s easier for them to get away with it.
3. Recently introduced cryptocurrencies
A common trait of a pump and dump scheme is that it happens to newly introduced cryptocurrencies.
This means that any new asset that you barely heard about isn’t exactly the best investment. While that may not always be the case, there’s no reason for you not to do your own research.
To be sure about your investments, make sure to go through the whitepaper of the asset to understand more about it and the problem(s) it’s solving.
Discovering a new crypto asset is great. It could be something that could help you build a stable portfolio in the long run. But it could also be something that’s designed to only turn against you and rob you of your money. Before you invest your money in an asset, invest your time in judging the credibility of the asset.
4. Unusual fluctuations
While crypto market fluctuation could be seen as something normal, a major pump in the stocks could also mean that they could go down to the bottom of the barrel.
When a large number of investors have fallen for the asset and have pumped their money into the market, a sudden price hike is common for a particular coin.
What happens during this phase is that the scammers holding the majority of shares bag a significant amount of profit, which they sell off right away before others could.
Generally, a lot of people that decide to buy an asset after being influenced by a post or tweet end up with a valueless coin or asset.
Towards the end…
During your time in the crypto industry, you’re bound to come across many projects that may seem too good to be true, which they could be as well.
To save yourself from such pump and dumps, money-sucking projects, it’s important to not rely on people for information but do a little bit of your own research.
Verify the authenticity of every project you come across. Even if your favorite celebrity is endorsing a project, it’s likely that they are being paid for that. Don’t believe everything you come across on the internet.