A pump and dumbo in crypto is a manipulation tactic that is employed by various social media influencers and other big-name traders to shift the market trends in their favor. In this technique, the coin’s value is inflated by attracting more traders and investors to it, then sold off in large amounts by a specific person or a group of people, which will result in the coin’s price to cash.
The scheme involves four steps or phases. The first phase is started during the pre-launch, followed by the launch and, lastly, the pump and dump. The first three phases instill fear in the investor’s mind that they are missing a huge opportunity. After they invest in this coin, the person who influenced them bails and sells off their crypto when the tide is in their favor.
To avoid falling prey to these manipulative tactics, you need to be aware of these pump-and-dumps, how they work, and what to watch out for. But the main thing is to make decisions based on pure logic and data rather than relying on your emotions.
Pump & Dump: A Detailed Analysis
A pump and dump in the crypto world is a fraud practice where the perpetrators initially acquire a large amount of low-value cryptocurrency. The next thing they do is promote this low-value currency through a well-planned marketing scheme. This leads to the artificial inflation of the coin in the market.
A lot of manipulative or misleading information regarding these coins is then circulated across different social media platforms. This is done to attract more buyers to these low-valued coins. This is the pump phase.
If the pump is well-planned and executed perfectly, the coins can drastically rise in the market. After this price shoots up, the perpetrators sell the coins in a large amount and profit from them. This is referred to as the “dump”.
When these orchestrators dump these tokens, the supply of the coin rises in large amounts and hence results in a price drop. After this, the prices of the coin have little to no chance of recovering as they didn’t have much value in the first place. This poses a huge problem for the people who purchased these tokens while their prices were being artificially inflated.
Evolution of Pump and Dump
Traditionally, the pump and dump were conducted using cold calling. A cold call refers to a visit or phone call to someone in an attempt to promote a specific product or asset. As the internet evolved, all of these are now done through various online platforms. Now, we have the means to transmit a single message to mass audiences through the internet. The fraudsters are taking advantage of this to promote their undervalued assets.
Nowadays, the scheme can be pulled off by anyone having influence and an online trading account. They can easily convince others that an undervalued stock or asset is a “hot buy” in the market. The masterminds behind these pump-and-dump schemes start their plan exactly like this by buying a large quantity of undervalued tokens.
This rapid buying of undervalued stocks helps create misleading information that the token’s demand is increasing. This can prompt them to buy the token before it shoots up again in the hope of gaining profit. At this point, the orchestrators behind this calculate the probability of the asset falling from its high place on the market. If this calculation reveals that the asset is ready to fall, then they immediately sell off or “dump” it for a huge profit.
How to identify Pump and Dump?
The SEC or the Securities and Exchange Commission has introduced several tips and information to protect everyday traders and investors from these types of pump-and-dump schemes. Some of them are listed below.
- Be wary of unexpected investment offers
Be extremely cautious around unexpected investment offers that are provided to you. We are currently living in a digital era, so these offers can reach you through any means including mail or social media posts in your account. You just have to ignore these messages or spam calls.
- Always look out for danger
The next thing you need to do is consider the offer. Does it sound too good to be true? Does it promise “huge” returns? Did they pressure you to buy it? You need to note all this, as they are all considered red flags in investment.
- Always be on the lookout for Fraud
Various affinity frauds are happening in the market. Affinity frauds are frauds that target people belonging to a specific group or community. In these scams, the scammer pretends to be a member of the group to gain the trust of these people. This can lead you to believe in the credibility of the investment idea proposed by them. But in the end, they will only fool you into investing in a “legitimate” asset, when in reality, it is a scam.
- Conduct your research and always stay vigilant
Before you invest your money, it is better to know what exactly you’re investing in. For this conduct thorough research about the market trends and the asset you’re investing. It also helps to know the companies that are backing the said assets. If you’re not provided with such information, then it would most probably mean that they are trying to scam you.
The Crypto market and the Pump-and-dump schemes
As the crypto market evolves, various individuals are using the pump-and-dump scheme to gain quick profit in the market. The massive gains made by various coins like Bitcoin and Ethereum are only adding fuel to this. And, there is the fact that the pump-and-dump scheme is the most ideal for the crypto market, especially because of the lack of regulations surrounding it.
In a study conducted in 2018, it was revealed that more than 3K schemes have unfolded in the crypto market. As the years passed, the number only rose. Even though the CFTC (US Commodity Futures Trading Commission) has offered a reward of 10-30% for any whistleblowers of pump-and-dump cases that exceed a million dollars in currency, it hasn’t amounted to much.
So, always be cautious in the market, especially if you’re a newcomer. You also need to be on the constant lookout for any red flags while considering investing in something. Stay cautious and be safe.