Financial scams have been responsible for creating more than 50% of losses for investors hailing from any discipline. Most financial scams happen when the investment product is new, or the investors do not possess complete knowledge about the said market.
Since the cryptocurrency market is only in its nascent years, it means that many people have taken up new cryptocurrency positions based on the market hype. Therefore, scammers are active and take advantage of users who have limited knowledge about crypto trading.
This article is going to discuss the details of pump and dump schemes that will help the reader identify, avoid, and learn its many dynamics.
What are Pump and Dump Scams?
Pump and Dump is one of the most common types of financial scams that can result in massive losses for outside investors. Pump and Dump groups or agents are the scammers who participate in and carry out the operation.
Therefore, they are the threat actors that get away with massive profits while the other investors who are caught up in the market speculation end up losing big money.
A pump and dump scheme happens when bad actors artificially inflate the price of a cryptocurrency, stock, or any other investment product by purchasing it in bulk.
What are Cryptocurrency Pump and Dump Schemes?
Just like any other investment product, illegally acting agents can target certain cryptocurrency projects for performing pump and dump operations. Most of the time, bad actors pick small-cap cryptocurrencies for hype prices or to create massive speculation.
The part where malicious agents are purchasing their targeted cryptocurrencies in bulk is called pumping. Pumping happens when users start to accumulate one cryptocurrency in big chunks without any valid reason. Other cryptocurrency investors are caught up in the speculation, and everyone starts to purchase more.
Eventually, the bad actors sell all their cryptocurrency reserves at once or dumping. Therefore, retail investors with small positions in the market end up experiencing losses in the marketplace.
How does a Pump and Dump Scheme Work?
Once the bad actors have taken up huge positions in the market, they start to spread fake projections about the said cryptocurrency. When investors with no trading experience view that a particular cryptocurrency whale has accumulated other digital assets in such a huge amount, they believe that price of that cryptocurrency is going to keep rising for a while.
At the same time, the massive buying pressure for the said cryptocurrency also increases persistently. Therefore, the supply shrinks, and prices shot upwards exponentially. The bad actors with the biggest cryptocurrency positions lay dormant for a while and let investors in the market go above and beyond to get a hold of rapidly appreciating cryptocurrency.
The most vulnerable investors in this case are the ones who cannot understand technical analysis. There are also massive numbers of investors who accumulate the cryptocurrency at a bigger price tag in hopes that it will keep inflating.
When the pump and dump group sense that they cannot inflate the price anymore, they sell their massive positions without any warning. The massive inflow of cryptocurrency suddenly increases, which takes out the price point by a huge margin. Therefore, the prices of the cryptocurrency drop down to near zero.
The inexperienced cryptocurrency investors are left with cryptocurrency with no value and no use case, and in most cases, the prices after the dump fell lower than the purchase point.
Origin of Pump and Dump Schemes
The earliest recorded example of a pump and dump scheme is said to be the infamous South Sea Bubble of the 18th Century.
The stocks of South Sea were sold in excess by Night wind hawkers who also helped in spreading the speculative news about the stocks. Before there were instant messaging mediums and the internet, scammers used the medium of communication such as emails and cold calls, and perpetrated their schemes using smaller exchange markets such as Pink Sheets or OTC Bulletin Boards.
There are also some instances where the members of the stock exchange acted as threat actors spreading insider information for investors to misguide them. Sometimes, financial brokerages also scam their clients or scam the market with pump and dump schemes.
Examples of Pump and Dump Schemes
Stratton Oakmont co-founder Belfort was arrested by the law enforcement agencies who were taking part in an elaborate pump and dump scheme.
The incident happed in the 1990s, and he tried to inflate the prices of a certain stock in his possession by spreading misleading information. The Hollywood movie called Wolf of Wall Street is the reimagining of the said incident that was penned down as a memoir.
Jonathan Lebed was 15 year old kid who ran a pump and dump scheme during the dot-com bubble. He purchased penny stocks and used the internet to create an exclusive stock bulletin. He posted fake positive projections about the said stocks on his online messaging boards. When some big investors fell for his tricks, he sold out to take profits.
However, the Securities and Exchange Commission eventually pursued legal action against him as a result of a civil lawsuit. Lebed was able to walk free after paying a small fraction of his income through the scam.
Enron enterprise’s top brass engaged in a pump and dump scheme. On account of their financial knowledge and trading experiences, they managed to trick even the top investors on Wall Street.
Enron executives shared fake profit reports about their company; however, a post on the Yahoo board revealed the actual devastating position of the company.
Squid token was inspired by a blockbuster show aired on the OTT platform Netflix called Squid Games. However, the token did not have any connection with the production team of Netflix or the South Korean series.
Despite providing no solid origin or use case, investors rushed to purchase squid tokens in bulk. However, threat actors eventually cashed out and left the investors in knee-deep losses.
Indicators of Pump and Dump Schemes
It can seem like there is no way to avoid a pump and dump scheme disguised in the cloak of positive appreciation and good projections. However, by keeping an eye on the following factors, investors can spot a pump and dump scheme from a million miles away:
An unnatural price movement is the most visible indicator of a pump and dump. Investors should pay attention to the DMA or Daily Moving Average price history for every cryptocurrency before purchasing. In most cases, investors use 20-day, 50-day, and 200-day DMA to see how an asset is faring in the market.
However, if a cryptocurrency has kept rising consistently without rhyme or reason, it means that there are malicious actors at work. Cryptocurrency aggregators like Walletinvestor.com can report and track a 5% increase within 5 minutes, which can alert investors about a potential scam.
Source of the Speculation
All cryptocurrency projects are invested in marketing their products to as many new investors as possible. However, pump and dump schemers track down a random cryptocurrency with questionable origin, a smaller market cap, and no real use case. They also become active on social media platforms like Telegram and Discord.
The scammers can also recruit social media influencers to solicit false or unreliable projections about their cryptocurrencies. Their main aim is to target new and inexperienced traders who are unable to understand the market dynamics.
Therefore, investors should always try to trace the source of the speculation and the main reason why a said cryptocurrency is trading in the marketplace.
Pump and Dump schemes usually pick cryptocurrencies that do not have sufficient trading volume or liquidity in the market. It allows them to freely control the prices at their discretion, and there are no adequate numbers of buyers or sellers for the said cryptocurrency, so price control is completely absent.
At the same time, the goal of the pump and dump schemers is to make profits in a limited time frame. Therefore, they take up massive positions on a shit coin to make sure that they make up the majority holders and have full control of the price movement.
When a cryptocurrency is subject to a pump and dump scheme, its market cap is going to indicate sudden and unwarranted increases. Many good cryptocurrency projects have gained massive speculation from investors.
However, in pump and dump schemes, the market cap of a said cryptocurrency is going to present a sudden sharp incline without any logical explanation. Therefore, investors should view the market cap history of a particular cryptocurrency and make sure that every major increase has solid reasons rather than speculation.
Regulated cryptocurrency projects are less likely to be targeted by financial scammers. The regulated currencies are under constant surveillance by law enforcement agencies. Therefore, threat actors cannot target them.
On the other hand, the cryptocurrency projects that are operating isolated from the regulatory environment present a higher threat of becoming pumped and dump schemes.
At the same time, cryptocurrencies that are listed on regulated cryptocurrency exchanges are also less likely to scam investors.
Types of Pump and Dump Groups
Pump and Dump Groups can form on social media platforms. These groups can wreak havoc in the cryptocurrency market and they have the potential to scam people across borders. Here are two basic types of such groups:
Transparent groups are the scammers who adopt the bolder approach. They frequently drop the term pump or dump while posting or airing live broadcasts. On the other hand, they also add some hint of a pump or dump in their channel names.
These types of scammers operate under the impression that despite all the clues if an investor still falls for their ruse they deserved to be scammed.
At the same time, these groups are trying for some random threat actors to team up with them without having any real contact and scam unsuspecting investors.
These are close-knitted groups that do not need any outside threat actors to join them. They never use the terms pump and dump in any of their conversations. They can also present fake financial data to fool investors with no technical insight into the market.
Such scammers often create exclusive chat rooms that recruit investors who are taken by artificial speculation regarding the targeted cryptocurrency. They will never allude to terms connected to financial scams to make sure that their victims never find out or try to look up and compare their schemes by researching and talking to other investors.
At the same time, these chat rooms can operate in a manner that only administrators are allowed to post.
How Do Pump and Dump Groups Operate?
Cryptocurrency investors should familiarize themselves with the tactics of the pump and dump schemers. So that they can intercept them on social media platforms:
Scamming groups can refrain from providing any information about the administrators such as their qualifications, background, authenticity, etc. In this manner, the users have no idea who they are dealing with.
At the same time, they can also create multiple chat rooms that contain only a few messages from the admins with a very small amount of investors present there.
On the other hand, the how-to or FAQ section posted on the electronic bulletin board can contain information for the users on how to successfully participate in pump and dump schemes.
The communication happening in a pump and dump group is far from effective or productive. Only the administrators can post in the group. The administrators will only post in the central hub and talk about pump signals regarding the group.
The admins will also alternate from one room to another to make sure that unsuspecting investors are unable to understand their schemes. They will post in one room about an upcoming pump season and flee into a secondary chat room to talk about dumping.
Server bots are present in a particular room section. These rooms allow investors to talk about their experiences and expectations. At the same time, users can request invitation links that are forwarded to inexperienced or targeted investors.
At the same time, the users who are participating in the scam can also find out how many new victims they have been able to recruit using their invitation link.
Some groups allow the aware investors to join one exclusive group and talk about their strategies and send pump or dump signals. Sometimes, threat actors can open discussion options for investors who have already taken up positions based on their speculation tactics.
This is a way to keep an eye on their activities and make sure that they keep holding their reserves under the pretense of earning more profits.
The admins of the group want to have full control of the pump and dump group. They will tell the investors about exchanges from where to purchase their tokens.
At the same time, they will use the OCR technique to escape the clutches of online spam filters. The name of the targeted coins is present on these images that are unreadable by text editors.
In this manner, the scammers who are knowingly participating in the scheme can get the pump signal while others remain impervious to the trick. Furthermore, scammers can use tactics like spreading FOMO among targeted investors to pressure them into buying when the prices are already pumping.
Are Pump and Dump Groups Legal in Crypto?
With the publication of books like “How to profit from Pump and Dump new crypto Projects” by Paul Sterner, there is a new precedent in the market.
Many cryptocurrency investors question if cryptocurrency pump-and-dumps are legal and permissible. The question is also difficult to answer since cryptocurrencies aim to exist outside the regulatory purview.
At the same time, it is difficult to trace down the identity of scammers who has programming knowledge and use VPNs to mask their locations or IP address. Therefore, it can be difficult to pursue legal action against these threat actors in case of a scam.
The quick answer to the idea that cryptocurrency pumps and dumps are legal is no. Any financial scam that results in harming the interests of any investors cannot be defined as a legal practice. In the case of pump and dump schemes, the perpetrators take up the majority of the total supply of the cryptocurrency.
On the other hand, their number in comparison to targeted investors is very small. Therefore, the investors who are benefitting from this criminal activity are only a few small amounts of investors.
On the other hand, it is clear that pump and dump schemes have been in practice before the presence of the cryptocurrency market and therefore financial regulators have already marked this practice as malicious and illegal with legislative clarity.
Pump and Dump Schemes may seem easy to spot but at times even trained professionals fell for these tricks. It is not an easy task to locate a pump and dump scheme easily but with the proper knowledge of the investing market and by understanding technical indicators investors can prevent stepping into the traps of scammers.
In most cases, pump-and-dump scammers pick small-capped, useless, and unknown cryptocurrencies with limited market caps that are easy to manipulate and inflate.
Therefore, investors should always look out for the telltale signs and try to spread awareness about such schemes with their friends and family members to make sure that more people know about them and make it harder for scammers to keep operating freely.