The SEC has warned that pump and dump schemes target cryptocurrencies, as they trade on unregulated exchanges and have volatile prices. Investors must be careful with advertisements or press releases seeming too good and research a project before buying it.

The skyrocketing value of cryptocurrencies has drawn a flood of investors unable to recognize a pump and dump operation.

Many people still need to learn how to identify a fraudulent pump and dump scheme to avoid losing money. They must recognize legitimate cryptocurrency investments and research facts and information on the market.

Defining a Dump and Dump Scheme

A pump and dump scam occurs when someone tries to inflate the price of a stock artificially. It consists of convincing others to buy it and then sell holdings at an inflated price.

That strategy includes distributing wrong or misleading information to create a buying frenzy and then selling high.

The Securities and Exchange Commission (SEC) has warned investors about looking for pump and dump schemes. These also target cryptocurrencies as they trade on unregulated exchanges and have volatile prices.

Identifying a Pump and Drain Scheme

Investors must first try to understand how a pump and dump scheme works. The criminals usually claim partnerships, features, or adoption to push the price of a token higher.

When the prices are high enough, the scammers sell their tokens at a profit. That situation creates a bubble that eventually bursts, causing investors to lose their funds. However, they can protect against pump and drain schemes in various ways.

Investors must be careful with advertisements or press releases that seem too good to be true. Besides, they must research the project and its team and never invest more than they can afford to lose.

The Importance of Being a Risk-Aware Investor

Besides being an exciting investment opportunity, cryptocurrencies also involve risks like the possibility of a pump and dump scam.

Investors can keep a few things in mind to avoid being victims of a pump and dump scheme.

They may look for coins promoted by multiple sources, as someone could be behind a suspicious pattern. In addition, they must be careful with projects whose value has increased overnight, which might indicate an artificially driven price.

Likewise, investors need to avoid investing in cryptocurrencies with low market volume, which makes them susceptible to manipulation. They should also research the cryptocurrencies they want to buy and understand the risks.

How to Locate a Legitimate Cryptocurrency Investment

Those interested in crypto assets must look for projects with a strong team behind them. That group of developers must have experience in the cryptocurrency space and be able to execute their roadmap.

It is also crucial to ensure the project is legitimate and not fraudulent. Investors should look at its white paper, which describes its goals and how to achieve them.

Finally, they should research the project and ensure they feel comfortable.

Cryptocurrencies are vulnerable to pump and dump schemes due to the high volatility of the crypto market. Investors must be aware that scammers can artificially inflate or deflate prices as they rise and fall.

By Alexander Salazar

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