How Are Cryptocurrency Schemes Creating Regulated Artificial Bubbles?

EG 672 How Are Cryptocurrency Schemes Creating Artificial Bubbles Regulated

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The emergence of cryptocurrencies has revolutionized the financial landscape, offering unprecedented opportunities for high returns and democratizing access to global finance. However, these same factors, coupled with the lack of regulation, have also made the cryptocurrency market a breeding ground for scams and schemes. 

These schemes not only defraud unsuspecting investors, but can also contribute to the creation of artificial bubbles of prices, leading to market instability. This article will explore the nature of cryptocurrency schemes, and how they create artificial bubbles.

While a scheme can be a bauble, a worthless trinket, let’s stay with the definition of a bubble. Commentators unschooled in crypto have declared cryptocurrencies (and particularly Bitcoin) a bubble. They mean that the price of a given coin, or of digital assets generally, is far higher than their “real” value. Of course, this comment is debatable, so let’s dig in.

What are Cryptocurrency Schemes?

Cryptocurrency schemes can be broadly defined as fraudulent or deceptive practices perpetrated within the realm of cryptocurrencies. They often involve the promise of high returns on investment, inflated project prospects, or the concealment of risks and realities associated with digital currencies. As cryptocurrencies have garnered popularity over the years, owing to their potential for high returns, decentralization, and anonymity, they have also attracted a fair share of fraudulent activity. These schemes typically exploit the relative lack of regulation, transparency, and understanding associated with the cryptocurrency market.

How do Cryptocurrency Schemes Work?

Cryptocurrency schemes operate in various ways depending on the nature of the fraud. They can be based on complex financial manipulations or straightforward scams. Typically, they involve the manipulation of cryptocurrency prices, the creation of fake initial coin offerings (ICOs), or Ponzi-style investment scams where the returns to old investors are funded by new entrants into the scheme.

Cryptocurrency schemes often exploit the innovative nature of blockchain and digital currencies, which can make their manipulations harder to detect. They leverage the lack of financial literacy in the domain, coupled with the luring promise of high returns, to deceive investors. These scams usually start with an enticing offer, be it a ‘get-rich-quick’ scheme, a lucrative mining contract, or a promising new cryptocurrency venture.

Common Types of Cryptocurrency Schemes

Ponzi Schemes

In a cryptocurrency Ponzi scheme, the organizer usually promises high returns to investors, luring them into the scheme. The early investors are paid using the funds received from new investors. The scheme continues until there are no more new investors to recruit, at which point the scheme collapses, leaving those at the bottom with significant losses. 

Pump and Dump Schemes

Cryptocurrency pump and dump schemes typically involve a small group of individuals or an organized syndicate that manipulates the price of a cryptocurrency. They “pump” the price by buying large volumes of a particular coin, creating artificial demand, and causing other traders to follow suit. This inflates the price significantly. The group then “dumps” the coin by selling off their holdings at the inflated price, causing a sharp price drop and leaving those who bought during the pump with worthless coins.

Fake Giveaways

Fake cryptocurrency giveaways are a prevalent type of fraud that involves scammers promising to double or even triple the amount of cryptocurrency you send them. They often impersonate celebrities or high-profile individuals in the cryptocurrency world on social media platforms, offering to send a significant return on the investment as a giveaway.

In reality, once the victim sends their cryptocurrency to the address provided, they will not receive anything in return. The scammers have complete control over the private keys associated with the address and can move the cryptocurrency to their own wallet. Unfortunately, due to the anonymous and irreversible nature of cryptocurrency transactions, it is often impossible to retrieve these stolen funds. As a rule, always be skeptical of any offer that seems too good to be true.

Fake Token Generation Events

Token Generation Events (TGEs) are fundraising mechanisms in which new tokens are issued to the public, typically in exchange for established cryptocurrencies such as Bitcoin or Ethereum. Legitimate TGEs have proven to be an effective means for cryptocurrency startups to raise funds for development and expansion. However, the emergence of fake TGEs has become an increasing concern in the crypto space.

Fake Token Generation Events are essentially fraudulent fundraising events conducted by scammers. They involve the creation of non-existent or worthless tokens, which are then marketed aggressively to potential investors. These scams can be incredibly sophisticated, often featuring professional-looking websites, promising whitepapers, and convincing marketing material to lure investors.

Once the perpetrators have collected enough funds from the unsuspecting investors, they disappear, leaving those who invested with worthless tokens that cannot be traded or used in any way. 

Pyramid Schemes

Pyramid schemes in cryptocurrency work similarly to traditional pyramid schemes. They recruit investors with the promise of high returns for joining the scheme and getting others to join as well. Participants are encouraged to recruit more investors to increase their returns. 

The primary source of profit comes from recruitment rather than from genuine investments or product sales. As the number of new recruits eventually falls, the pyramid collapses, and those at the bottom are left with losses.

What Are Artificial Bubbles in Crypto?

So, an artificial bubble in the cryptocurrency market refers to a situation where the price of a cryptocurrency inflates far beyond its intrinsic value. This is often a consequence of speculative trading and other market manipulations that drive up the price, creating a surge that, although impressive, is not based on the fundamental value of the asset.

When the bubble “bursts,” it results in a rapid drop in price, leading to substantial financial losses for those who bought into the cryptocurrency at its inflated prices. This cycle of rapid inflation and deflation can be hugely damaging, creating instability in the market and eroding trust in cryptocurrencies.

Factors Contributing to the Creation of Artificial Bubbles in Crypto

Market Manipulation

Market manipulation is one of the key contributors to artificial bubbles in the cryptocurrency market. This often involves a group of individuals or entities buying large volumes of a particular cryptocurrency to drive up its price artificially and attract other investors. Once the price has inflated sufficiently, these individuals sell off their holdings, causing the price to plummet and leaving other investors with substantial losses.

False Hype

In the world of cryptocurrencies, hype can be a powerful tool. False hype can be created by spreading misleading or inflated claims about a particular cryptocurrency or project, leading to increased demand and an inflated price. This is often seen in cases of ICO fraud, where scammers create hype around a nonexistent or fraudulent project to lure in investors.

Lack of Regulation

The lack of regulation in many aspects of the cryptocurrency market contributes to the creation of artificial bubbles. Without oversight, it’s easier for malicious actors to manipulate the market or create false hype. While regulators worldwide are catching up with this evolving industry, the lack of clear, unified, and effective regulation allows for greater volatility and risk.

Inflated Expectations

Lastly, inflated expectations can contribute to the creation of artificial bubbles in the cryptocurrency market. When investors have unrealistic expectations about the potential returns from a cryptocurrency, they may be more likely to invest in it, driving up the price. However, when it becomes clear that these expectations will not be met, the price can drop rapidly. 

Do Cryptocurrency Schemes Fuel Artificial Bubbles?

There is an intricate connection between cryptocurrency schemes and the creation of artificial bubbles in the market. Cryptocurrency schemes, with their luring and deceptive practices, can significantly distort the price of cryptocurrencies, creating a ‘bubble’ that can burst at any time, leaving investors with hefty losses.

The Process of Inflation

Cryptocurrency schemes often involve manipulative strategies that artificially inflate the price of a particular cryptocurrency. For instance, in a pump and dump scheme, a group of investors may deliberately inflate the price of a cryptocurrency by buying large quantities. This sudden influx of demand often attracts other unsuspecting investors who, seeing the price rise, decide to buy in hopes of gaining profit. This only serves to inflate the bubble further.

Creating a Vicious Cycle

Cryptocurrency schemes not only create artificial bubbles but also contribute to a vicious cycle of boom and bust in the cryptocurrency market. Each time a bubble bursts, it erodes trust in the market, causing prices to fall. However, the promise of high returns and the lack of regulation mean that new schemes keep emerging, starting the process all over again.

This cycle can be incredibly damaging, not just for individual investors, but for the wider cryptocurrency market. It creates instability, deters new investors, and undermines the potential benefits and uses of cryptocurrency. Furthermore, it distracts from the innovative potential of blockchain technology, the underpinning technology for cryptocurrencies, which can be leveraged for many other applications beyond cryptocurrencies.

Recognizing Red Flags in Cryptocurrency Schemes

Cryptocurrency schemes can be shrouded in complex technical jargon and high-return promises. However, there are several key red flags that potential investors should be aware of to protect themselves against such deceptive practices.

Unrealistic Promises

One of the most telling signs of a cryptocurrency scheme is the promise of unrealistically high returns with minimal risk. Investments inherently involve a degree of risk, and any guarantee of high returns with little to no risk is often a sign of potential fraud.

Lack of Transparency

A legitimate cryptocurrency project or investment opportunity will provide comprehensive and clear information about its operations, including details about the project developers, its purpose, and how it works. If this information is missing, vague, or difficult to understand, it might be a warning sign of a scam.

Pressure Tactics

Cryptocurrency schemes often use pressure tactics to lure investors. These tactics may include time-limited investment opportunities or claims that you will miss out on significant profits if you don’t invest immediately. Legitimate investments rarely require such immediate action and pressure.

Unsolicited Communications

Another red flag is receiving unsolicited communications about investment opportunities. Scammers often use unsolicited emails, messages, or phone calls to draw investors into their schemes. If you receive such communications, especially those with promises of high returns, treat them with extreme caution.


In the rapidly evolving world of cryptocurrencies, the double-edged sword of innovation and risk is ever-present. While cryptocurrencies offer unique investment opportunities, they are also susceptible to schemes and scams that can create artificial bubbles, leading to substantial financial losses when they burst. 

Recognizing red flags in cryptocurrency schemes and understanding the role of regulatory measures is crucial for any potential cryptocurrency investor. As the sector matures, the strengthening of regulatory frameworks, investor education, and international cooperation will be vital in making the cryptocurrency market safer and more reliable for investors worldwide.


What is an artificial bubble in cryptocurrency?

An artificial bubble in cryptocurrency refers to a situation where the price of a cryptocurrency is inflated far beyond its intrinsic value, often due to speculative trading and market manipulations.

What are the common types of cryptocurrency schemes?

Common types of cryptocurrency schemes include Ponzi schemes, pump and dump schemes, Initial Coin Offering (ICO) fraud, and pyramid schemes.

How does a cryptocurrency Ponzi scheme work?

In a cryptocurrency Ponzi scheme, organizers promise high returns to investors and pay early investors using funds from new investors, leading to eventual collapse when new investment ceases.

Can cryptocurrency schemes contribute to artificial bubbles?

Yes, cryptocurrency schemes can fuel artificial bubbles by inflating cryptocurrency prices and creating false demand, which leads to unsustainable price increases.

What is a pump and dump scheme in cryptocurrency?

A pump and dump scheme involves a group of investors artificially inflating (pumping) a cryptocurrency's price to attract other investors, then selling off their holdings (dumping), causing the price to plummet.

How can investors protect themselves from cryptocurrency schemes?

Investors can protect themselves by being wary of unrealistic promises, lack of transparency, pressure tactics, and unsolicited communications related to investment opportunities.

What role does regulation play in preventing cryptocurrency schemes?

Regulation plays a key role in preventing cryptocurrency schemes by setting rules for cryptocurrency exchanges, overseeing Initial Coin Offerings (ICOs), and educating investors about potential risks.

What are some red flags of ICO fraud?

Red flags of ICO fraud include vague or missing information about the project or the team, unrealistic promises about potential returns, and pressure to invest quickly.

How does market manipulation contribute to artificial bubbles in cryptocurrency?

Market manipulation, such as pump and dump schemes, can artificially inflate a cryptocurrency's price, creating an unsustainable surge that, when it collapses, leads to a significant price drop or 'burst bubble'.

Why is international cooperation important in regulating cryptocurrency?

Cryptocurrencies operate globally, so scams can also operate across borders. Therefore, international cooperation is crucial for developing consistent regulations and sharing information to tackle these schemes effectively.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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Damilola Lawrence

Damilola is a crypto enthusiast, content writer, and journalist. When he is not writing, he spends most of his time reading and keeping tabs on exciting projects in the blockchain space. He also studies the ramifications of Web3 and blockchain development to have a stake in the future economy.

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