5 tips to avoid losing money in a crypto ‘pump and dump’

Crypto ‘pump and dump’ schemes can be an easy way to lose money. Here’s a look at how they work and steps you can take to avoid them.

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The world of crypto can be confusing and hard to navigate at the best of times. And unfortunately, there are many people out there trying to take advantage of the confusion through ‘pump and dump’ schemes.

I’m going to explain everything you need to know about these schemes, including how to avoid them and why high-profile celebs such as Kim Kardashian and Floyd Mayweather Jr. got fooled into promoting these cryptocurrency cons.

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[top_pitch]

What is a pump and dump crypto scheme?

A pump and dump scheme involves an asset being heavily promoted (often with false benefits) to try and raise its price. People are encouraged to invest their money and buy the asset. Then, once the value rises significantly, those promoting or owning a large stake sell their holdings and crash the price.

‘Pump and dump’ is probably one of the most crass-sounding terms in finance, and it doesn’t just apply to crypto cons. There have been plenty of instances of this kind of thing happening with regular shares. That said, it’s far less common and mostly seen amongst penny stocks.

Another prevalent crypto scam is a ‘rug pull’, which works slightly differently. While a pump and dump involves some liquidity after artificially inflating an asset, a rug pull involves making a project completely disappear. And the creators of the project take everything!

How can you avoid losing money in a pump and dump?

Adam Morris, co-founder of Crypto Head, shares his top five tips for avoiding pump and dump schemes:

1. Be wary of huge returns

If something sounds too good to be true, it probably is. So, always look deeper into any platforms or projects offering crazy returns. The same goes for those advertising a scheme as a foolproof way to make money.

2. Don’t take advice from celebrities

Celebrities often have very specific talents or skills. However, it’s rare that a celeb or influencer is going to be a personal finance or investing expert.

If you’re looking for sound financial information, it’s best to avoid the likes of boxers and reality TV stars. Instead, check-in with a financial adviser or do your research somewhere respectable – like The Motley Fool!

3. Use a trusted exchange

If you invest in digital assets, always try and make sure you use an exchange with a solid reputation. Don’t send money or cryptocurrency to platforms you’ve never heard of if you want to keep your funds safe and secure.

4. Consider an offline wallet

Using something like an offline Bitcoin wallet can help to keep your coins secure. Along with making it harder for people to hack, the added security might reduce the chance of someone sucking you into a tempting scheme.

5. Understand crypto investment

If you can’t explain to someone how an investment works within a few sentences, consider an alternative. The lack of understanding around even some of the biggest crypto projects is what makes people vulnerable to scams.

This also applies to buying shares or any other kind of investment. You should always thoroughly understand what you’re putting your money into.

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Why are celebrities promoting crypto scams?

Some celebrities will do anything for a bit of cash. Others will simply promote products with no clue about how they work. This creates a dangerous effect when you consider the influence celebs have when advertising directly using social media. Adam Morris provides details of a recent example of a crypto pump and dump.

“In this case, you have figures such as media personality Kim Kardashian, boxing legend Floyd Mayweather Jr. and basketball legend Paul Pierce, who have made false or misleading statements about EthereumMax. Combined, these three celebrities have tens of millions of followers across their social media platforms.

“This, if used by celebrities and prominent figures, could generate millions in profit for them whilst simultaneously creating huge losses for everyone who bought into it.”

Investing in Cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in Cryptocurrency. Should you decide to invest in Cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.

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