What is NFT Pump and Dump Schemes?
Since the peak of the pump of NFT projects in 2021, the market sentiment has portrayed evident signs of confusion. The world has been astonished as pictures of apes sold for tens of millions of dollars. A sea-water size of headlines about million-dollar NFT hacks has flooded the internet as corporate cash grabs intensified. The real question remains, are NFT projects just a pump and dump? Let’s dig deeper.
What Are NFTs?
NFTs are non-fungible tokens that are stored and distributed in the blockchain network. Non-Fungible in the NFT term means the tokens are unique and rare. This attribute distinguishes NFTs from each other and differs from Fungible tokens such as Bitcoin, Ethereum, and Solana. NFTs are one of a kind. They represent digital media in the distributed ledger technology network, including sound clips, images, videos, and digital art.
Technology fanatics have touted digital media as a form of revolutionizing digital art in the mode of buying and selling. However, a narrower look at NFTs reveals a shocking discovery. Most NFT projects are merely pump-and-dump schemes developed to make a few crypto goons with insider information rich. Most of these goons are the people behind the project and a few early birds.
How Pump and Dump Schemes Work
Pump and dump projects are scam projects in the crypto and NFT world where developers and a few blockchain maniacs hype a scam project to a fever pitch to lure oblivious enterprising investors into investing their funds in the scam. As soon as a target market cap is achieved, the project developers shut down the project and make away with the funds. In most cases, this accounts for millions of dollars lost.
The project originators typically use social media influencers on YouTube, Telegram, Discord, and Instagram to lure the hype and bring the FOMO aspect to the ‘everyday mom and dad’ investors. Unfortunately, before investors can cash out, the project collapses, and investors lose their money as selling pressure pushes the price lower.
The Intrinsic Value of NFTs
Non-Fungible Tokens flooded the news headlines in March 2021 when a Beeple, a massive JPEG representation, sold for $69.3 million with the transaction fully paid in the cryptocurrency ETH. Beeples had been a crazy hype pumped by crypto bros for months leading up to the mega sale, a trade that brought the entire world’s attention to NFTs. The rarity of the NFT was calculated based on the demand. Increasing demand during the auction increased the number of bids, raising the prices leading up to the purchase.
It is true to say that 90% of NFT projects fail. The failure is because the overall intrinsic value of NFTs is zero. The value of NFTs solemnly depends on the overall market demand and how much the world is willing to pay for digital art or collectibles. If the market is unwilling to purchase an NFT, its price tumbles to rock bottom.
The Million Dollar Tweet Pump and Dump
In April 2022, an Iranian-born Crypto entrepreneur Sina Estavi bought a pumped NFT of the first ever tweet by Twitter Co-Founder Jack Dorsey. The online entrepreneur bought the tweet for $2.9 million. Estavi listed the NFT on sale again for $48 million, only to be in for a rude shock at the end of the auction.
The auction closed mid-week on a Wednesday with only seven offers that ranged from 0.09ETH at the time’s market price of $227 and 0.0019ETH at the current market price of just under $6.
How To Avoid Pump and Dump NFT Schemes
Education
Self-education has always been the number one prevention measure against any FOMO decisions. Self-education on the NFT ecosystem is essential for enterprising NFT fans to pursue at all times. Potential investors should concentrate much time and effort on scrutinizing projects before jumping in for the ride. Having the proper knowledge will enable investors to spot fraudulent NFT projects and avoid them at all costs. These projects create a hype that drains out millions from oblivious investors overnight, popularly known as pump and dump schemes.
Avoid Pump and Dump Schemes
A Reddit discussion post highlighted pump and dump schemes running on discord servers and Telegram Channels. The pump and dump schemes involve luring people looking to get rich quickly. They buy small bits of a specific NFT project slowly by slowly announcing for a pump and dump on the NFT project they already own.
They explain to investors that they should buy and sell quickly, but once the pump begins, they dump their shares to the late buyers.
Invest in projects with a track record
Since most NFT projects fail, investors should invest their money into projects with a good track record. Users can’t know beforehand what NFT project will skyrocket, but investing in projects with a good track record decreases the odds of a pump and dump.
Pump and dump schemes target small NFT projects with small market capitalization since it is easy to manipulate such prices. Large projects like the Bored Ape Yacht club and Cryptopunks have colossal market caps making them impossible to be affected by pump and dump schemes. Large projects also offer a haven for investors in uncertain markets.
Pump and dump schemes always happen in crypto and NFT markets. Crypto Fans looking to invest in NFT projects should be informed and educated on investing in volatile markets using less risky environments. Enterprising crypto fans are also advised to avoid joining pump and dump schemes to get rich quickly. To avoid pumps and dumps, beginners should initially invest in legitimate NFT collections.