Alright, hold onto your seats, because we've got a big problem on our hands, and it's one that's been festering for quite some time. You see, there are these things called pump and dump schemes, and they've been a thorn in the side the wild and woolly world of cryptocurrency, and they're wreaking havoc like it's nobody's business.
What Is A Pump And Dump
Let's start with the basics: a pump and dump scheme is a scam in which the holder of a tradable asset, like a stock or in our case crypto, heavily hypes and promotes it to other investors, often using misleading statements like "this coin is going to the moon", or "1,000X profits coming" etc.
This overhype causes the price of an asset to rise rapidly as new investors buy into the hype-train. Then, when the price is high enough, the holders sell off their overvalued shares at a profit, causing the price to plummet. This leaves the newer investors holding the bag with a low-value asset. It's a classic bait and switch, and it's not pretty.
I've been on the recieving end of these schemes, and it's never nothing nice. It only took me once to learn my lesson.
Now, the problem is that pump and dump schemes have become shockingly common in the world of cryptocurrency.
It's not hard to see why: bad actors can launch a new token with relative ease and establish an artificially high price and market capitalization for it.
They do this by seeding the initial trading volume and controlling the circulating supply. Plus, the teams behind these new projects and tokens can remain anonymous, which means that serial offenders can carry out multiple pump and dump schemes without any fear of reprisal.
So, what does a typical crypto pump and dump scheme look like?
Picture this: an undisclosed token is launched, and the creator heavily promotes it to crypto enthusiasts on social media.
This leads to hundreds of victims buying the token on a popular decentralized or centralized exchange, which allows the price to rise quickly in a matter of hours or in some cases minutes.
But here's the kicker: within the same day of launch, the creator sells off all of their tokens, leaving the buyers holding the bag and a handfull of hopium. The fraudster makes a quick buck, and the buyers are left with a worthless asset.
Now, this is a problem for obvious reasons. Pump and dump schemes have the potential to cause massive financial losses for unsuspecting investors.
And the sad truth is that the scale of this problem is staggering. Chainalysis recently analyzed all the tokens launched on Ethereum and BNB blockchains in 2022 and found that out of over 1.1 million tokens, only 40,521 gained sufficient traction.
But of those tokens, 9,902 saw a price decline in the first week indicative of possible pump and dump activity. That's a lot of scammy tokens, and a lot of unsuspecting victims.
It's not just the victims who suffer, either. Pump and dump schemes have the potential to do real harm to the crypto industry as a whole.
After all, if the general public perceives cryptocurrency as rife with scams and frauds, it's going to be difficult to convince them to invest. And that could be a serious problem, because many believe that cryptocurrency is approaching an inflection point that could spark mass adoption.
The Classic Ponzi Scheme
You might think that pump and dump schemes are just some kind of isolated scam, but the reality is that they're just a small piece of a much larger puzzle. That's right, I'm talking about the granddaddy of all scams: the Ponzi scheme.
What Is A Ponzi Scheme
Now, if you're not familiar with the Ponzi scheme, let me give you a quick rundown.
It's a fraudulent investment scheme in which returns are paid to earlier investors using the capital contributed by newer investors.
The scheme relies on the constant influx of new investors to pay off earlier investors, and it typically falls apart when there aren't enough new investors to sustain the payouts.
In other words, it's a pyramid scheme in which the early investors get rich, and the later investors get screwed.
The most famous example of a Ponzi scheme is the one run by Charles Ponzi himself back in the 1920s. Ponzi promised investors huge returns in just a matter of weeks by taking advantage of international postal reply coupons. The scheme worked for a while, but eventually collapsed when too many investors tried to cash out at the same time.
But Ponzi schemes are still occuring today, and they're not always as easy to spot as the original.
In fact, some of the biggest financial frauds in history have been Ponzi schemes. Take the case of Bernie Madoff, for example. Madoff was a financier who ran a massive Ponzi scheme for decades, convincing investors that he was using complex trading strategies to generate huge returns.
In reality, he was just paying off old investors with money from new investors.
When the scheme finally collapsed in 2008, it wiped out the life savings of many people and sent shockwaves through the financial world, and thus Bitcoin was born.
So, what does all of this have to do with pump and dump schemes?
Well, the truth is that they're just a small offshoot of the larger Ponzi scheme. In a pump and dump scheme, the holders of a tradable asset hype it up and promote it to other investors, causing the price to rise rapidly. Then, they sell off their overvalued shares at a profit, leaving newer investors holding the bag with a low-value asset. It's the same basic principle as a Ponzi scheme, but on a smaller scale.
The bottom line is that both Ponzi schemes and pump and dump schemes are dangerous and destructive. They rely on the naivete of investors to make a quick buck, and they often end in tears.
That's why it's so important to be vigilant and to do your due diligence before investing in anything. Don't be fooled by promises of easy money, and don't let yourself become the next victim of a financial fraud.