What is Pump and Dump?

Get to know about one of the major scams in both crypto and stock trading before start trading.

Let's understand Pump and dump in a nutshell. A pump and dump scheme refers to a group of people artificially inflating the price of an asset through recommendations based on false, misleading, or greatly exaggerated statements. In essence, they will buy an asset for a low price all at once, prompting the price to rise. This sudden and rampant increase in nominal value will prompt unknowing traders to jump in and purchase the asset as they hope to ride a bull market. The original buyers then sell (dump) the assets to make a quick profit. This shift in supply and demand often causes many users to make a significant loss.

This can be found on both crypto and classic exchanges that have been around for years. It is illegal on regulated crypto and classic stock exchanges. However, the unregulated crypto field has provided a rich ground for the schemes because users are sure they will not be easily caught by authorities.

At the center of pump and dump schemes is a team of tech-abled, motivated, and organized players. Sometimes maybe disguised entrepreneur. These players operate from different points to make the public look genuine.

The favored medium of communication for traders involved in pump-and-dump are social media platforms or anonymized messaging apps like Telegram and Discord. Here is a list from Walletinvestor that suspects pump and dump scams in cryptocurrency exchanges.

This is how they fool people... From the 2013 movie “The Wolf Of Wall Street”.

First comes the pumping…

The team often includes investors who provide funding to buy the tokens and raise the demand. If the token selected is a low volume type asset, buying most of them allows scammers to control the supply and regulate the price.

When players purchase coins, they tend to engage in the forums and chat boxes to share with others the coin of their choice. These players will regularly use multiple accounts and other players usually help them in making it look more real. This leads to the coin being talked up creating a buzz causing people to get interested and purchase the coins- ultimately creating the pumping process. When people start to buy in huge numbers, the price goes up fueling the buzz even further. Inexperienced traders tend to believe that the stock/coin is going to higher and higher and they may be spread the news among their friends and families as well. Investors and traders rush to buy the tokens in fear of missing out at a high price.

And then the dumping…

After the prices rise spectacularly and the stock or crypto coin is even recorded by media platforms, then it is time for the scammer to sell the shares, and then the hype and demand fizzle. The price suddenly crashes as investors realize it was a scam. But it is already too late!

Except for the initial investors who were aware of the scam, of course, no one is left with a profit. Often free or paid pump and dump groups are set up by this type of scams. Especially if you don’t know the organizers very well, the chances are very high that you will also be scammed by the paid groups. There is always another group that knows even earlier about the scam.

Many stock exchanges, but also crypto exchanges, have machine learning models to identify those kinds of sudden price fluctuations, however, those are aren’t guaranteed. Especially ones that take more than five days to start dumping.

Here’s a video to understand easily how it happens on classic stock exchanges.

Final thoughts...

Do not be emotional when investing in cryptocurrencies. Though a cryptocurrency might be hyped up so much, the truth is that there are a dozen others still out there. Therefore, do not be emotional about buying tokens. Do your own research, do not depend on other’s decisions.

University of Westminster | Software Engineer

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