Fake news and deepfakes: fueling crypto pump-and-dump scams
Pump-and-dump schemes are thriving in the Web3 space, powered by hype, anonymity, and unregulated markets. Understanding their tactics is crucial to avoiding costly traps.
Web3 pump-and-dump schemes trick investors by making it look like they have a lot of cryptocurrency, but actually they don’t. They then sell it all at once, making a lot of money. The industry is vulnerable because it’s decentralised, anonymous and trades 24/7 without any regulation.
These schemes follow four stages:
- Pre-launch: Hype is built around a new or low-valued token.
- Launch: Promotion ramps up, often involving unsuspecting influencers.
- Pump: Fake news and misleading information drive the price up.
- Dump: Orchestrators sell off their holdings, causing a price crash.
You can protect yourself by:
- Avoiding unsolicited investment advice.
- Being skeptical of social media ads.
- Avoiding schemes promising unrealistic returns.
The wild west of Web3
Coordinated pump-and-dump schemes have plagued the Web3 ecosystem for years. The allure of quick profits attracts manipulators who exploit others’ belief in unrealistic promises. With regulations playing catch-up and the decentralized design of the industry, these schemes have often flown under law enforcement’s radar. However, recent efforts, like Operation Token Mirrors, show that Web3 is not impervious to regulators.
How they work
Pump-and-dump schemes are when people deliberately try to make a cryptocurrency’s price go up by buying it and sharing false information. When the desired price is reached, the people in charge sell their tokens, which leaves other investors with tokens that have lost value. The “pump” is when prices are made to go up, and the “dump” is when they subsequently go down and crash.
The way Web3 is designed, with no single central authority, makes it easy for the market to be influenced. Token creators often hide behind internet anonymity and use privacy-focused communication channels, making it difficult to hold them accountable. Additionally, markets trade 24/7 without concrete regulatory oversight. Easy token creation on platforms like Pump.fun further exacerbates the problem. Insiders regularly net profits of over 100%, sometimes exceeding 2,000% in a single event.
Staying safe
Distinguishing manipulation tactics from legitimate opportunities can be difficult. Here’s how to spot potential fraud:
- Avoid unknown investment advice: Be wary of strangers offering “sure thing” investments.
- Crypto social media ads: Be cautious of investment ads promising high returns, especially those featuring celebrities (who may be deepfakes).
- Do your own research: Investigate the founders, developers, track record, and company information.
- Spread your risk: Don’t commit the majority of your funds to a single investment; diversify to mitigate risk.
Be vigilant for promises of high returns for little risk in a short timeframe. Remember, some coins can be targets of repeated pump-and-dump attacks.
