Key takeaways
Pump-and-dump schemes in Web3 manipulate a cryptocurrency’s price through coordinated buying along with misleading information and hype to lure investors in before a mass selling of a token, leaving it almost worthless.
Decentralized anonymity and 24/7 unregulated trading make the industry particularly vulnerable to these manipulative investment schemes.
A pump-and-dump follows four stages, including the token prelaunch, promotional hype building at launch, price pumping through buying action and a coordinated sell-off by orchestrators running off with profits.
You can protect yourself from falling for pump-and-dumps by avoiding unsolicited investment advice, being skeptical of social media ads and avoiding schemes with promises of unrealistic returns in short time frames.
Coordinated pump-and-dump schemes have dogged the Web3 ecosystem and crypto market for years. Often described as the Wild West of the digital world, the allure of quick profits has always attracted those looking to manipulate investments at the expense of others who believe unrealistic promises.
With regulations continually playing catch-up, combined with the decentralized design of the industry, these schemes have often gone under the radar for law enforcement. Still, recent efforts show that Web3 is no longer impervious to regulators. For example, in October 2024, Operation Token Mirrors resulted in $25 million being seized and 18 people being charged.
In this article, you’ll learn about “pump-and-dump schemes,” including their definition, how they operate and how to protect yourself from these sophisticated manipulation tactics.
What are pump-and-dump schemes in Web3?
A pump-and-dump scheme refers to the intentional manipulation of a cryptocurrency or blockchain asset’s price. The market price of these digital assets is achieved through coordinated buying coupled with misleading information.
Once the scheme ringleaders achieve their desired price, they initiate a violent sell-off to take their profits. This results in all other investors sitting on severely devalued or worthless tokens. The phrase refers to this process of “pumping up” a token’s price, then “dumping” the token and the price concurrently. As these assets generally have little to no value, the price never recovers, and innocent investors are stuck.
Why do pump-and-dump schemes work in Web3?
The peer-to-peer decentralized design of Web3 makes it a fertile ground for this type of market manipulation. Often, token creators and project developers hide behind internet anonymity and use privacy-focused communication channels like Telegram. This makes it difficult for investors and authorities to hold schemers accountable for their deception.
Additionally, markets are tradeable 24/7 without concrete regulatory oversight or circuit breakers. Easy token creation on platforms like Pump.fun, which saw over 1 million tokens launched in 2024, further exacerbates the problem.
Did you know? The insiders of a pump-and-dump scheme regularly net profits of over 100% and in the top cases, over 2,000% in a single event.
How pump-and-dumps work in Web3
Web3 pump-and-dump schemes tend to follow four stages: pre-launch, launch, pump, and dump.
Pre-launch: To kick things off, hype is built around a new or relatively low-valued token. This is done using strategies like pre-sales and community building on platforms like Telegram, Discord and X.
Launch: Promotion ramps up a new level, often including promoters like unsuspecting influencers to widen awareness and attract more excited investors.
Pump: Misleading or fake news is spread through the community about potential big price increases or business partnerships. This skyrockets the market price of the token as people invest increasing amounts while pushing demand through the roof.
Dump: When the Web3 token price manipulation reaches an attractively profitable level for the orchestrators, they sell off their holdings in large amounts. The huge sell-off causes the token’s supply to massively exceed demand and drop prices. Investors left holding tokens cannot sell before the token value is almost completely wiped out.
Did you know? Some coins can be targets of repeated pump-and-dump attacks. According to a study from the University of Bristol, the most attacked coin was targeted 98 times over a four-year period.
Staying safe and spotting pump schemes in crypto
It can be difficult to distinguish Web3 trading manipulation tactics from an enthusiastic and legitimate investment opportunity. The potential rewards from getting in early on the next big legitimate crypto token provide perfect cover for the illegitimate decentralized pump-and-dump operators.
Here’s how to spot potential fraud and coordinated crypto pump groups:
Avoid unknown investment advice: If a stranger contacts you on social media or a messaging app and quickly turns the conversation into a “sure thing” investment, then be wary. It’s best to be cautious and not engage.
Crypto social media ads: Social media platforms have been plagued with investment ads that promise high returns. They might appear like legitimate companies or even use fake media to fool investors. Be particularly wary of high-profile celebrities who appear to be promoting Web3 projects. Often, manipulators create deepfakes of well-known names without their permission or backing.
Do your own research: Don’t fall for pressurized investment opportunities where it’s a “now or never” chance to invest. Always take your time to research projects. You should find out about the founders, developers, track record and company information. If this is obscure or insufficient, then it’s best to avoid investing.
Spread your risk: Be vigilant for investment promises of high returns for little risk in a short timeframe. Certainly, don’t commit the majority of your funds to any single investment; instead, diversify your funds to spread the risk and rescue losses on any investments that go wrong in the event of crypto market manipulation in Web3.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.