In pumping, a group of developers or investors tries to convince others to buy a coin by either pumping the price up or spreading misleading information about the coin. Cryptocurrency pump-and-dump is also explained as the founder, contributors, or group of traders spreading misleading information to raise an asset’s price, then selling shares at a higher price.
A crypto pump works like any other pump-and-dump scheme. In it, the sponsors of a cryptocurrency market it well in order to generate hype and raise its value. Then, they sell their own staches of the coin while the coin is at its peak. After this, the coin’s value plummets and becomes worthless.
It may also be called rigging a price by spreading false information, and then as soon as the price increases, they start to dump or sell at a higher price. Essentially, a group of people buys a resource for less at one time, pushing up the resource.
Then, the group sells (dumps) the asset for a quick profit. Once the price has been completely up, the scammers who created it, sell off their shares, with buyers coming through anyway. When a group now buys coins on what they think is the pre-pump market, the perpetrators of the scam dump their stake. The group flooded the pre-pump market, trying to grab a few coins before, they believed, information was released to the public.
Pump-and-Dump Are Classic Scams
A pump-and-dump is when a group or individual plans to pump an asset onto the market and dump it to profit. The creators of the pump-and-dump scam plan to make money off of innocent investors, encouraging them to purchase an asset on false information.
When investors purchase tokens that are a part of the pump-and-dump scam, they are effectively creating profit for scammers, which are sold in the world’s cryptocurrency markets for a price far higher than what scammers paid. When an innocent investor buys, the pumpers are selling, which drives down the price.
After waiting until the price has increased to an unconscionable amount, the investor group starts selling off its tokens. Then, the group of investors dumped much or all of their holdings on the market, causing the crash. With the coins now trading for a much higher value, the crooks behind the scam begin unloading their holdings, making significant gains in the process.
Generally, once the original buyers that started the pump-and-dump scheme are out in the markets, and the propaganda campaigns have faded, prices fall, with large losses for everyone holding shares or tokens.
How Crypto Markets Normally Fluctuate
Generally, once the person or group who started the entire scheme leaves cryptocurrency markets, publicity naturally goes down. With that, prices will fall, and those who believed and participated in the intended pump-and-dump will then lose the value of the assets that they bought, as it was being pump-and-dumped in error.
The organizers will then coordinate a sell, say, dump, to make sure that everybody pays up, leaving public investors holding the bag. Pump-and-dump schemes generally occur when a group of investors gets into a good business in advance, and then get other investors to buy and push up prices even more.
One of these scams is known as pump-and-dump (P&D), in which the bad actors try to turn a profit by spreading false information about a good (i.e., specific crypto coins) to drive up its price artificially (Kramer 2004). Cryptocurrency pump-and-dump schemes may involve social media influencers, who are financially incentivized for telling people to buy a particular digital coin to increase its value.
On the Legality of Such Schemes
Crypto pump-and-dump, where investors push up the price of a coin, only to sell all (or dump) it, driving down its value, is still technically illegal, although some movements are taking place in this direction. In the cryptocurrency space, completely fake information is used in pump-and-dump schemes, since those running scams are not under any regulations, and regulators are only beginning to crack down on those that are acting in bad faith.
Because the technology behind crypto is relatively new, and because most exchanges are not regulated, pump-and-dump manipulation is not always illegal at this point; and even where it is, it cannot always be enforced easily.
As we shall see, the lack of regulation, and the worldwide nature of the worlds cryptocurrency markets, makes them a perfect venue for bad actors to run pump-and-dump schemes, with little consequences for the con artists that are adept at taking advantage of greedy traders that do not think the transaction through. While this industry has plenty of legitimate opportunities, a lack of regulations across several countries opens the door for abuses in market practices — such as nefarious cryptocurrency pump-and-dump schemes.
To summarize, as soon as an unknown coin with only a few million dollars of market capitalization suddenly gains attention and the social media buzz increases, you need to exercise caution when investing in this specific coin, as the chances are good it is just the product of pump-and-dump schemes. When one sees the surge in social media activity surrounding a smaller-cap coin or crypto-project, this can be a sign that the start period of a scheme is underway.
When someone writes a marketing email or a social media post using phrases such as This cryptocurrency is the next big thing, or This is Bitcoin 2.0, a and prices rapidly increase, it may signal pump-and-dump.