Pump and dump is a fraudulent market manipulation scheme that involves artificially increasing (pumping) the price of an asset, followed by a quick dump by those orchestrating the scheme, leaving other investors with significant losses. While this is a common tactic in the equity markets (particularly with penny stocks), it has become particularly visible and problematic in the cryptocurrency world due to its less regulated nature.
How a pump and dump scheme works
The process usually unfolds in several stages:
Choice of asset: The scheme organizers choose a cryptocurrency (or other financial asset) with a small market capitalization and low liquidity. These assets are easier to manipulate as it does not require huge capital to influence their price.
Pre-pump: The ‘orchestrators’ of the scheme secretly purchase a significant amount of the chosen asset at a very low price before they start ‘pumping’.
The Pump: This is the stage where the price is artificially inflated. The perpetrators trigger an intense and coordinated promotional campaign using false, misleading or exaggerated information about the asset. Tactics include:
- Social mediahype: enthusiastic posts on Twitter, Telegram, Discord, Reddit, online forums.
- Collaborations with influencers: They actively promote certain cryptocurrencies without disclosing that they are being paid for the promotion. If you want to learn more about the crypto universe, we invite you to explore our blog article: Cryptocurrency market: The $3 trillion industry that almost nobody understands.
- Fake news or misleading press releases: They invent partnerships, major technological developments or imminent launches to generate a wave of excitement.
- “FOMO” (Fear Of Missing Out) tactics: Investors are pressured to buy quickly, with promises of huge and quick profits.
As more and more investors, attracted by the hype and the rapidly rising price, buy the asset, demand increases exponentially and the price “inflates”.
Dumping (The Dump): Once the price has reached a level considered profitable (or when signs of a rise begin to diminish), the organizers of the scheme quickly sell all their accumulated assets. This massive selling sharply increases supply, while demand falls, leading to a sudden and dramatic price collapse.
Who loses out?
The victims are inexperienced investors or those who get caught up in hype and FOMO, buying the asset at artificially inflated prices. When the organizers sell their holdings, these investors are left with almost worthless assets, suffering substantial financial losses.
Risks and legal implications of Pump and Dump
Pump and Dump schemes are illegal and a form of securities fraud in most jurisdictions. Financial regulators, including those in the crypto space, actively monitor such practices and may impose large fines or even imprisonment for those involved. They undermine confidence in the market and can cause significant financial damage.
How to protect yourself from pump and dump:
- Be skeptical: If an investment sounds too good to be true, it probably is.
- Do your own research (DYOR): Don’t rely solely on information from influencers or social media groups. Analyze the project, the team, the technology and the actual utility of the cryptocurrency.
- Watch out for sudden and unwarranted spikes: A rapid price increase without fundamental news or significant developments is a red flag.
- Avoid assets with low liquidity: These are more susceptible to manipulation.
Are you an investor and have a favorite cryptocurrency you follow? You can find an up-to-date price by visiting our dedicated cryptocurrency price list page.
And if you want to plan your strategy, our cryptocurrency profit calculator helps you anticipate your profit or loss at a glance, based on the bid, ask and ask price and the amount allocated.