understanding the risks of pump and storage schemes in cryptocurrency
The world of cryptocurrencies has grown in recent years, many new users entering the market every day. While cryptocurrencies provide a high degree of liquidity and flexibility, they are not lacking in their risks. One of the most significant threats for investors is the pump and DUP scheme.
What is a pump and dump scheme?
A scheme of pumps and dump is a type of fraud of the securities that involve the artificial swelling of the price of a cryptocurrency or another financial tool by spreading false information about its value, which makes it more valuable than it is. The scheme is based on a group of individuals to artificially inflate the price by coordinated marketing, false news or other means.
How does a pump and dump scheme work?
Pump and storage schemes usually follow this process:
- The initial offer of coins (ico) : A company creates a new cryptocurrency and begins an ico to raise funds from investors.
- Marketing campaign : The company begins to sell cryptocurrency through social media, E -Email campaigns and other channels, creating hype around its value.
- Price inflation : As several investors buys in the token, its price begins to rise rapidly, which makes it look more valuable than it is.
- False news : False items or posts are created to support pump and storage scheme, further inflating the price.
- dumping : When the price reaches a certain level, the group of people involved in the scheme sell their coins at the swollen price, causing the price to fall.
Risks associated with pump and storage schemes
While cryptocurrencies are generally considered a low risk investment, pump and storage schemes may have significant risks. Here are some potential consequences:
* Losing funds : Investors who buy a pump and storage scheme can lose their entire investment if they sell at the swollen price.
* Losing faith in cryptocurrency : Sudden loss of value can lead to loss of investors’ faith in cryptocurrency, causing them to abandon or move on to other investments.
* Regulatory problems : Pump and storage schemes are often investigated by regulatory organisms, which can consider them as a fraud of the securities. This can lead to fines, penalties or even the scheme closing.
Examples of famous pump and storage schemes
Over the years, several high profile pump and storage schemes have been exposed. A remarkable example is the investment scam of Cryptocurrency Bitconcy of $ 1 billion, in which a group of people have created fake news and social posts to promote cryptocurrency, bitconnect.
Another example is the ICO 2017 scandal involving competitors Bitconnect, Coincheck and their own CEO of Bitconnect, Kyubey Nakamura. The scheme involved the spread of false information about the value of these cryptocurrencies, artificially swelling their prices before throwing them.
How to protect yourself from pump and storage schemes
To protect you from pump and storage schemes:
* Do your own research
: Before investing in any cryptocurrency, research the project in detail and understand the technology, the team and the basic market.
* Check information : Be away from fake items or posts. Check for information through renowned sources before sharing them with others.
* Diversify your portfolio : Spread -investments in multiple cryptocurrencies to minimize risk.
* Monitor the regulatory activity : Stay up to date with the regulatory developments related to the cryptocurrency industry.
Conclusion
Cryptocurrency is a high risk investment, and pump and storage schemes are just one of the many potential risks. By understanding these schemes and making measures to protect you, you can make the knowledge of your investments and reduce your risk exposure.