Pump and Dump
Traders are all looking to make a profit based on technical and fundamental analyses of financial markets (cryptocurrency markets included), and many opportunists want to make a huge profit quickly. They may turn to punishable and illicit schemes, taking advantage of the large capital at their disposal from unsuspecting traders (usually newbies). One such scheme is known as pump-and-dump.
Pump-and-dump involves making misleading and false statements that elicit FOMO (fear of missing out) and FUD (fear, uncertainty, doubt). The pump-and-dump scheme is punishable in the stock markets and may involve hefty fines for the perpetrators when identified. However, less-regulated markets, such as the cryptocurrency market, have become the new playground for pump-and-dump scammers.
How does pump-and-dump work, and what can traders and investors do to protect themselves from falling victim to this popular scheme?
How Pump-and-Dump Works
The pump-and-dump scheme is the act of artificially inflating the price of assets, such as securities or cryptocurrencies, to sell positions to unsuspecting investors who are set to lose a large portion of their investment funds or their entire investment once the inflated price drops down to the real value. The scheme starts with hype or false, misleading news that aims to convince the unsuspecting investors that they are missing out on a major opportunity to turn a great profit in a short amount of time.
Pump-and-dump schemes are driven by scammers who are investors themselves and have established their position in the asset they are falsely promoting under the veil of hype, FOMO, and FUD. The goal is to attract as many new investors as possible, usually targeting newbies who are not aware that the price of the cryptocurrency or other asset is being purposely manipulated towards an inflated value.
The “pumping” part usually involves a group of investors sending emails, sending messages, and creating ads that convince more investors to join in and take advantage of supposed the opportunity to make large profits. These scammers (investors) already have positions, usually in microcap shares or smaller cryptocurrencies that have no intrinsic value and are sometimes the centrepiece of the scam itself.
Some small-cap cryptocurrencies are made precisely to fool traders into believing that they are investing in the ‘new Bitcoin’, when in fact, they are set to lose their investments to scammers.
Once the price of the crypto or asset is inflated, the “dumping” part arrives as the following and fatal blow. The investors behind the scheme sell their positions once the price is inflated. Because this group of investors holds multiple and the majority of the positions, the price of the pumped asset significantly drops. As a consequence, the traders and investors who believed they were about to cash in on a once-in-a-lifetime opportunity, lose money and, thus, waste their investments.
Who Stands Behind Pump-and-Dump Schemes
Pump-and-dump schemes are not necessarily conducted by big-time investors who hold the majority of the positions. With the expanding use of the internet, practically anyone—even an individual who has bought positions in a cryptocurrency or asset—can try to convince other investors to buy that same asset. The perpetrator will pump the price by buying the given crypto at a low value, assuring other traders and investors that the asset is about to take off and bring major gains to all investors involved. Once the scammer can see that the buying pressure is about to drop, the scammer easily sells their positions at higher prices, making a massive profit from the pump-and-dump scheme.
In most cases, the pump-and-dump schemes with most severe impact on unsuspecting victims are conducted by smaller groups of investors who agree to inflate the price of a crypto so that they can later dump their positions and make a profit. The larger the sum of money the scammers invest in buying positions, the larger the profits they will make after dumping. That is why these types of scams are usually backed and supported by one or more ‘whales’ (investors who have major capital power at their disposal and, thus, able to buy more positions or cryptocurrency units). The greater the amount of cryptos dumped within the scheme, the greater the impact on the price in the market, causing the victims to lose their money while the scammers collect gains.
How Pump-and-Dump Scammers Choose Cryptocurrencies
Most new investors who are interested in cryptocurrency have heard of Bitcoin’s major rises from them being worth under one dollar to the top price of $20,000 per coin. That is why traders and investors are looking for a similar opportunity, believing that the opportunity to get rich fast is hidden in small-cap cryptos that are less well-known to the public.
The majority of these smaller cryptos on the list below of the top 400 traded coins are spam and scam cryptos, created with no value or as a part of a scheme such as pump-and-dump. Even in cases where small-cap coins are not specifically created as a scam, perpetrators can still hype up the value of these assets to convince traders and other investors to buy their positions while the price is low with the promise that the price will continue to rise and bring them large profits.
Technically, scammers can create hype around any crypto on the market, but because small-cap cryptos are less well-known to the public, these digital assets are likely to be targeted by pump-and-dump scammers.
How to Protect Yourself from Pump-and-Dump Schemes
The first thing you can do to protect yourself from falling victim to pump-and-dump schemes is to resist the hype. Fact-check any and all news you encounter, with a special focus on the news that appears to be created to intimidate or hype up the public.
Before investing, do your research, referring to technical and fundamental analyses, as well as the background of the crypto you are considering investing in. Scammers are usually paid promoters and investors who are less likely to mention risks and will instead focus on the hype they are creating.
Pump-and-dump scammers are most likely to approach you on Telegram channels, social media, or through email campaigns to try to convince you to buy your positions as soon as possible. One of the rules that can be applied in such cases is, ‘If it sounds too good to be true, then it probably is’
The Securities and Exchange Commission is actively working on educating traders and investors on scam crypto projects and pump-and-dump schemes. It recommends that traders always do thorough research before risking their money.