The mechanism of artificial inflation and collapse: how cryptocurrency fraud works

Rug Pull through pump and dump is one of the most common schemes of manipulation in the cryptocurrency market. Essentially, it is a coordinated attack on market efficiency, where a small group of participants (, often insiders or early holders of the asset ), deliberately artificially inflate the price of the digital asset to extract profit.

Anatomy of a Criminal Scheme

The process begins with accumulation. Organizers buy up significant volumes of the token, whether it is a standard crypto asset or NFT, when the price is still at a minimum. Then, the phase of active propaganda is launched: positive forecasts are spread on social media, rumors about upcoming partnerships and technological breakthroughs, which are often fictitious, are circulated. This informational campaign attracts uninformed investors who start to buy the asset en masse, hoping for quick profits.

Critical Point and Reversal

As demand rises, the price reaches a peak, and it is at this moment that the initiators of the pump begin a massive dump — they unload their positions onto the market. The avalanche of sales leads to a collapse in value. Late participants, who bought at the top, find themselves trapped: their assets lose value by tens of percent, and trading volumes become insufficient for an immediate exit from the position.

Why this is dangerous

Such manipulations harm not only individual traders but also the entire cryptocurrency ecosystem. They undermine trust in the market, deter legitimate investors, and serve as a reason for increased regulation by authorities. In many jurisdictions, such actions are classified as Rug Pull and can lead to criminal liability.

Instead of participating in risky schemes, it is recommended to conduct thorough analysis of projects before investing, rely on trusted sources of information, and invest only in assets with real utility and a transparent development team.