While peer-to-peer (P2P) trading without intermediaries offers lucrative opportunities, one of the darker sides of decentralized finance (DeFi) is the rise of pump-and-dump schemes that steal millions from unsuspecting investors.

Distinguishing legitimate crypto projects from scams can be challenging, but fortunately, there are certain warning signs to watch out for. Before pouring funds into a flashy new altcoin, it’s important to know how to recognize the typical red flags of a crypto pump-and-dump scheme.

In this guide, we’ll tell you what you need to know.

What is a crypto pump-and-dump scheme?

A crypto pump-and-dump scheme is a fraudulent tactic where scammers use misleading information to generate hype and artificially "pump" a cryptocurrency’s value. Pump-and-dump coordinators may target an existing token or create a new one specifically for the scheme. Typically, the altcoins used in pump-and-dump schemes tend to have a low market cap, which makes them more volatile and easier to manipulate than established coins like Bitcoin (BTC). 

After enough unsuspecting traders buy into the artificially inflated cryptocurrency, the perpetrators sell their holdings at higher prices. This coordinated sell-off causes the cryptocurrency price to plummet (or "dump"), leaving investors who bought at the peak with worthless digital assets. 

How do crypto pump-and-dump schemes work?

Pump-and-dump schemes vary in execution but generally follow a similar pattern. Whether targeting a speculative token or embedding malicious code into a cryptocurrency, these scams rely on misleading the public to generate excitement and deceive investors.

Coordinating efforts

A group of individuals organizes – often through private social media channels or forums – to select a cryptocurrency for their scheme. They coordinate details such as the target token, buying timelines, and the price at which they plan to sell. Once participants acquire significant holdings, they begin spreading false hype to lure unsuspecting investors.

Generating hype

Pump-and-dump scammers use social media channels like Reddit and X to post ads or fake news about their token project. Some pump-and-dump teams may employ influential figures like celebrities or crypto influencers to amplify the buzz and create a "fear of missing out" (FOMO) effect, driving more traders to buy.

Pump phase

As investors buy into the hype, the price of the target token rises rapidly. The sudden surge attracts even more crypto traders, who aim to capitalize on the momentum. This creates a self-reinforcing cycle of price increases, further boosting the cryptocurrency’s value. 

Dump phase

When the cryptocurrency reaches a pre-agreed price, the perpetrators sell off their holdings simultaneously. This coordinated offloading floods the market with supply, causing the cryptocurrency's price to plummet. Panic selling ensues, leaving investors with near-worthless assets. 

Examples of crypto pump-and-dump schemes 

From the initial coin offering (ICO) craze of 2018 to the non-fungible token (NFT) boom of 2021, scammers have consistently sought opportunities to manipulate the crypto market. Among these schemes, pump-and-dump operations have occasionally extracted millions of dollars from the ecosystem.Here’s a closer look at a few notable examples:

Paycoin (XPY)

Launched by Josh Garza and his company GAW Miners in 2014, Paycoin was marketed as a revolutionary digital currency backed by a $100 million reserve and a guaranteed minimum price of $20. This bold promise, paired with aggressive marketing, attracted many investors and drove Paycoin’s value higher. However, the reserve funds never existed, and insiders sold off their holdings as the price surged. By the time the scheme unraveled, Paycoin had defrauded investors of an estimated $9 million, and Garza faced wire fraud charges in 2017.

SaveTheKids token (KIDS)

Marketed as a charity-driven cryptocurrency, SaveTheKids targeted social media and gaming platforms, particularly fans of FaZe Clan. The project claimed to feature an "anti-whale mechanism" to build trust with investors and prevent large holders (or "whales") from dumping their tokens immediately after launch. In reality, the developers manipulated the token's code before its release, allowing insiders to easily sell their holdings. The token price initially spiked due to FaZe Clan’s popularity and the project’s supposed charitable intentions. However, insiders dumped their holdings within a few hours, triggering a sharp crash in the KIDS token’s value.

McAfee's Coin of the Day

Best known for founding McAfee antivirus software, John McAfee became a prominent figure in the 2017–2018 crypto bull market. Branding himself as a crypto guru, McAfee regularly featured small-cap cryptocurrencies as part of his “Coin of the Day” series on social media. Investigations later revealed that McAfee and his team purchased large amounts of these cryptocurrencies before promoting them. Once their announcements drove up the price, they sold their holdings for significant profits, leaving unsuspecting investors with inflated assets that soon plummeted in value.

Are pump-and-dump schemes the same as rug pulls? 

Rug pulls are another cryptocurrency scam that, like pump-and-dump schemes, rely on false hype to lure unsuspecting investors but operate differently. In a rug pull, the perpetrators abandon their project entirely. Rather than pursuing goals outlined in a roadmap or whitepaper, they siphon liquidity from early investors and delete all associated social media accounts immediately afterward.

One notable example is the Frosties NFT collection, created by Ethan Nguyen and Andre Llacuna in 2021, which was one of the first NFT-related legal actions in the U.S. Promising future utility and benefits like staking rewards, Nguyen and Llacuna raised $1.1 million during the ICO. Shortly after, they drained all investor funds and terminated the official Frosties feeds, leaving backers with nothing. In 2022, the Southern District of New York charged both with operating a money laundering scheme. The case marked a significant shift toward increased enforcement in the digital asset space to hold NFT creators accountable, highlighting the growing scrutiny of fraudulent activities in the burgeoning NFT market.

Are pump-and-dump schemes illegal?

In established and regulated markets like the stock market, pump-and-dump schemes are unquestionably illegal. This form of market manipulation violates regulations set by governmental agencies like the U.S. Securities and Exchange Commission (SEC), and convicted offenders face significant penalties.

In the cryptocurrency space, however, tracking and prosecuting perpetrators is far more challenging. The decentralized and pseudonymous nature of blockchain protocols makes identifying criminals more difficult, and varying regulations across jurisdictions add further complexity to charging and arresting pump-and-dump fraudsters. Despite these challenges, enforcement efforts are evolving. For instance, in the U.S., agencies like the Department of Justice (DOJ) have increasingly leveraged blockchain analysis tools to trace illicit activities and prosecute crypto scammers. These tools help authorities follow transactions on the blockchain, even across decentralized networks. 

Schemes involving registered security tokens fall under the SEC's jurisdiction, but speculative utility tokens or collectible NFTs often exist in a regulatory gray area. Globally, as regulators introduce new crypto laws, such as MiCA in the European Union, and cryptocurrencies become more mainstream, more policies and task forces are emerging to prevent pump-and-dump scams.

How to avoid crypto pump and dump schemes

The best way to steer clear of crypto pump-and-dump schemes is to avoid investing in them. While distinguishing scam cryptocurrencies from legitimate projects can be challenging, there are a few common warning signs to look for:

Be extra cautious with speculative altcoins

Small and obscure tokens are prime targets for pump-and-dump teams. Whenever hunting for "crypto gems" in the altcoin market, exercise greater caution, especially with crypto projects lacking transparent information or liquidity on multiple platforms. Pay close attention to metrics like trading volume, market cap and liquidity. Tokens with disproportionately low liquidity relative to their market cap are often manipulated. 

Watch for strange price spikes

Seemingly random price spikes and volume abnormalities are telltale signs of scam activity. If a token's recent gains lack clear fundamentals, consider market manipulation the most likely cause until thorough research proves otherwise. Tools like CoinGecko, CoinMarketCap and TradingView can help verify trading volume and price consistency.

Be skeptical of influencers

Never use online influencers as a primary source of information. Throughout crypto history, some influencers have been paid to promote scam projects or even actively participate in schemes. Rather than relying on flashy promotions or celebrity endorsements, always "do your own research" (DYOR) into an altcoin's fundamentals, such as tokenomics and team credibility. Tools like blockchain explorers can verify team wallet activity. 

Watch for affinity fraud tactics

Pump-and-dump schemes often use affinity fraud tactics to exploit trust within specific communities, promoting fraudulent investments through shared interests, cultural ties, or group affiliations. Always verify the legitimacy of emotional appeals or claims of collective success before committing to an investment. This includes examining the project’s transparency, leadership, and verifiable partnerships.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.