Detecting and Avoiding Altcoin Pump-and-Dump Schemes: A Behavioral Finance Perspective

A flowchart illustrating the lifecycle of a pump-and-dump scheme, from social media hype to liquidity withdrawal, with annotations highlighting behavioral biases like FOMO and anchoring.

The cryptocurrency market's volatility has long been a double-edged sword, offering both explosive gains and catastrophic losses. Among the most insidious threats to retail investors are altcoin pump-and-dump schemes-coordinated manipulations that exploit psychological vulnerabilities to extract profits at the expense of unsuspecting participants. As of 2025, these schemes have evolved into highly sophisticated operations, leveraging behavioral finance triggers and digital tools to amplify their impact. Understanding their mechanics and psychological underpinnings is critical for investors seeking to avoid becoming victims.

Behavioral Finance Triggers: The Psychology Behind the Pump

Pump-and-dump schemes thrive on predictable human biases. Overconfidence and anchoring biases, for instance, drive investors to overreact to fleeting signals, such as celebrity endorsements or viral social media posts. A case in point is Elon Musk's influence on Dogecoin (DOGE), where his tweets-ranging from praising it as "the future currency" to dismissing it as a "hustle"-triggered sharp price swings, according to a Chainalysis report. Similarly, the SQUID token, inspired by Squid Game, saw its price surge to $2,800 after a tournament announcement, only for liquidity to vanish, leaving investors with worthless assets, the Chainalysis report showed. These events highlight how anchoring (fixating on arbitrary price points) and herding (following the crowd without analysis) create fertile ground for manipulation, according to a Coin article.

Fear of Missing Out (FOMO) further exacerbates the problem. In 2024, the YZY token-a memecoin tied to Kanye West-was hyped on Telegram and Discord, with 13 wallets netting $24 million while retail investors faced a 70%–85% correction, as the Coin article reports. Political endorsements, too, have been weaponized. Argentinian President Javier Milei's rumored support for Libra cryptocurrency caused a 500% price spike, only to collapse when no official backing materialized, Chainalysis noted. Such cases underscore how confirmation bias-interpreting information to confirm preexisting beliefs-can mislead investors into acting on unverified claims, the Coin article notes.

Market Manipulation Patterns: From Hype to Exit

Modern pump-and-dump schemes rely on three pillars: social media orchestration, liquidity manipulation, and artificial volume creation. Coordinated campaigns on platforms like Telegram and Discord spread hype rapidly, often using fake accounts and bots to amplify reach, the Coin article documents. Once a token's price is inflated, orchestrators execute liquidity withdrawals or wash trading-simultaneous buying and selling by the same actor-to create false demand, the Coin article explains.

Data from Chainalysis reveals that 90,408 Ethereum-based ERC-20 tokens in 2023 met criteria suggesting pump-and-dump activity, with 70% of pre-event volume transacting within one hour of the pump announcement. This rapid coordination minimizes the window for counter-schemes but also leaves detectable on-chain footprints, such as sudden liquidity withdrawals by a single address, Chainalysis notes. For example, the MYX Finance token's 1,400% surge in seven days was flagged by on-chain analysts for red flags like abnormal volume spikes, the Coin article reported.

Bar chart showing the percentage of Ethereum-based tokens involved in suspected pump-and-dump schemes (24.4%) versus their share of total DEX trading volume (1.3%) in 2023.

Detection and Avoidance: A Rational Investor's Toolkit

Avoiding pump-and-dump schemes requires a blend of technical analysis and behavioral discipline. First, investors should scrutinize a token's liquidity and trading history. Tokens with historically low volume or sudden liquidity removals are red flags, the Coin article warns. Blockchain analytics tools can trace wallet activity, identifying patterns like rapid accumulation before a pump, as shown in an arXiv study.

Second, social media verification is critical. The arXiv study found that integrating Telegram announcements with on-chain data improved detection accuracy, uncovering previously undetected events. Investors should cross-check claims with independent sources and avoid acting on hype alone.

Finally, emotional regulation is key. Behavioral finance principles suggest that anchoring and FOMO distort decision-making. Establishing strict entry/exit rules-such as limiting exposure to unproven tokens-can mitigate impulsive trades, the Coin article suggests.

Conclusion: Navigating the New Normal

As pump-and-dump schemes grow more sophisticated, investors must adopt a proactive, data-driven approach. The interplay of behavioral biases and market manipulation tactics creates a volatile landscape where caution and critical thinking are paramount. By understanding the psychological triggers and technical indicators of these schemes, investors can better protect themselves from the next wave of crypto manipulation.