Cryptocurrency has been in the news a lot recently. Many people who invest in different coins are experiencing the highs and lows of the volatile market. Many people are wondering, “How does cryptocurrency work?” In this blog, we’ll explain what cryptocurrency is, how it works, and the dangers of pump and dump schemes with alt coins and companies like FTX.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency. It uses cryptography to secure and verify transactions and to control the creation of new units. It operates independently of a central bank and is decentralized, meaning it is not controlled by any government or financial institution.
The first and most well-known cryptocurrency is Bitcoin. Bitcoin was created in 2009 by an unknown person or group of people using the pseudonym Satoshi Nakamoto. Since then, thousands of other cryptocurrencies, or altcoins, have been created, such as Ethereum, Litecoin, and Dogecoin.
How Does Cryptocurrency Work?
Cryptocurrency operates on a technology called blockchain, which is a decentralized, digital ledger that records transactions on multiple computers. Each transaction is verified and then added to the blockchain, creating a permanent record that cannot be altered.
When someone sends or receives cryptocurrency, the transaction is broadcast to the entire network of computers. Each computer checks to ensure that the transaction is valid. If the majority of computers agree that the transaction is valid, it is added to the blockchain. After that, the sender’s account is debited, while the receiver’s account is credited.
To incentivize people to maintain the blockchain and verify transactions, a process called mining is used. Miners use powerful computers to solve complex mathematical equations. When they solve the equation, they are rewarded with newly created cryptocurrency. The mining process also helps to keep the blockchain secure by making it more difficult for someone to alter the ledger.
The Dangers of Pump and Dump Schemes
Unfortunately, the decentralized and unregulated nature of cryptocurrency has made it a breeding ground for fraudulent activities. This includes pump and dump schemes. In these schemes, a group of people coordinate to artificially inflate the price of a particular cryptocurrency. They do this by buying it up in large quantities and then spreading positive news and hype about the coin to attract new buyers. Once the price has reached a certain level, the group sells their holdings. This causes the price to plummet and leaves many investors with substantial losses.
One company that has come under fire for its alleged involvement in pump and dump schemes is FTX.
FTX is a cryptocurrency exchange that offers a wide range of trading products, including leveraged tokens, futures, and options. According to a report by blockchain analytics firm Chainalysis, FTX was responsible for nearly 70% of all leveraged token trading volume in 2020. Leveraged tokens are a type of cryptocurrency that is designed to amplify gains and losses. They have been a popular target for pump and dump schemes.
FTX has denied any involvement in pump and dump schemes, but the company has come under scrutiny from regulators in the United States and other countries. In March 2021, the UK’s Financial Conduct Authority (FCA) issued a warning to consumers about the risks of investing in cryptocurrency. They specifically mentioned FTX as a company that had been operating without regulatory approval.
How to Protect Yourself from Pump and Dump Schemes
If you’re interested in investing in cryptocurrency, it’s important to be aware of the risks. It’s also important to take steps to protect yourself from pump and dump schemes. Here are some tips:
Do Your Own Research.
Before investing in any cryptocurrency, do your own research to understand the technology behind it, the team behind the project, and the potential risks and rewards.
Look for Legitimate Exchanges.
Only trade on legitimate cryptocurrency exchanges that are regulated and have a good reputation. Do not use small, unknown exchanges that may be more susceptible to fraud and hacking.
Be Wary of Hype.
Be cautious of cryptocurrencies that are being hyped up on social media or in online forums. Always do your own research and make informed decisions based on your own analysis, not just what others are saying.
Set Realistic Expectations
Cryptocurrency is a volatile and unpredictable market. Set realistic expectations for your investments and don’t invest more than you can afford to lose.
Diversify Your Portfolio.
Spread your investments across different cryptocurrencies and other asset classes, such as stocks and bonds, to minimize risk.
Cryptocurrency is a complex and rapidly evolving market that can be both exciting and risky.
Understanding how cryptocurrency works and the dangers of pump and dump schemes is crucial for anyone looking to invest in this space. By doing your own research, using legitimate exchanges, being cautious of hype, setting realistic expectations, and diversifying your portfolio, you can protect yourself from fraud and make informed investment decisions.