Pump and Dump Cryptocurrencies: what they are and how they work. Popular Pump and Dump schemes

Pump and Dump is an old scheme where the value of a certain asset rises rapidly, after which it is quickly sold in order to profit from the price increase.

Pump and Dump are illegal under securities law; but these schemes are also extremely famous in the world of cryptocurrencies and digital assets.

The Internet as the main reason for the spread of Pump and Dump

Before the Internet appeared, it was quite difficult to organize a pump and dump. Some have managed to organize Pump and Dump in person, over the phone, or by regular mail.

With the advent of the Internet, pump and dump schemes have become much easier to organize. Now everything is done through communication in instant messengers. For example, in Telegram and Discord there are many thematic groups and channels related to Pump and Dump.

Mechanism of Pump and Dump schemes

In a pump-and-dump scheme, well-planned marketing artificially inflates the price of a worthless asset, which is usually a money stock with a low market capitalization.

Misleading and false statements, signatures, a number of social media posts and other tricks are used to spread the word that a worthless asset is indeed a hot buy and that investors should not miss this opportunity (pump).

A well-planned pump leads to an increase in the price of an asset, and as soon as investors find out about this, they begin to buy shares (asset). Investors who have invested in assets and participate in a pump and dump scheme will sell or "dump" shares of these overvalued assets. These investors make a profit from the sale of an asset many times more than the price at which they purchased it. But when they start selling shares of an overvalued asset, the price of the asset decreases and is adjusted to a more adequate and accurate assessment.

Types of Pump and Dump Circuits

There are several types of pump and dump schemes that can be used by scammers. They include the following:

1. The classic Pump and Dump scheme

The classical scheme may include any manipulation of information about the company and its shares (assets). This scheme may include telephone advertising of stocks, fake news releases, and the dissemination of any "insider" information that may increase the price of the stock. In addition, the services of unscrupulous promoters can be used to attract investors' attention to shares (assets).

2. Boiler room (Boiler room, boiler room)

The Boiler House is a small brokerage firm that employs several brokers who use dishonest sales methods to sell questionable investments to investors. Brokers often use cold calls to sell stock in a small cap firm, wanting to sell more shares to increase the price. In the event that the share price rises strongly, the company sells its shares for a large profit.

3. Scheme "Wrong number"

The "wrong number" method is a new pump and dump scheme. Some people may receive voice messages from strangers with "hot" investment advice. The scammers want you to believe that the voicemail was accidentally left on your phone. However, this is a purposeful action aimed at attracting the attention of potential investors to a particular stock and increasing demand for this stock.

How to define a pump-and-dump scheme?

There is no single rule for determining whether a cryptocurrency or a token is used in a pump and dump scheme. Investors need to research and apply their sound judgment when they decide to risk a token or coin. However, the following indicators often serve as red flags:

• Big buzz. Excessive hype around a particular coin or project can be a clear sign of pump and dump activity. Bulk marketing emails and social media posts with enticing messages like “this coin is the next big thing” or “bitcoin 2.0 is here” followed by rapid price increases can mean pump and dump. When unusual hype arises around a cryptocurrency or token for no good reason, it can be a wake-up call. In this case, potential investors should continue to research this coin.
• A sharp jump in prices for tokens or cryptocurrencies. All pump and dump schemes are characterized by a sharp rise in price over a short period. This can happen to any coin, but it usually targets previously unknown, ignored, or forgotten coins.
• Advertising cycle. This process follows the hype and news about a particular coin or project, which often coincides with purchases made by insiders. This creates the illusion that something big is happening and this promotional cycle gets more potential buyers to see what's going on. This leads to even more price increases until the bubble bursts.

Four Tips for Avoiding Pump and Dump Schemes

Pump and dump schemes are common in the crypto space and can work at any time. Here are some tips to help investors avoid becoming a victim, as recommended by the Securities and Exchange Commission:

1. Beware of unwanted investment offers. Investors should exercise extreme caution if they receive unsolicited messages about "investment opportunities". With a variety of virtual communication channels, such messages can reach investors in a number of ways, including emails, comments, or posts on social media pages.
2. Beware of obvious red flags. As an investor, this is where you need to trust your instincts. So-called investments may sound too good to be true, promise huge "guaranteed" returns, and come with "buy now" pressure. These are all common red flags for pumps and dumps.
3. Do your own research and due diligence. Before investing in any high yield project, investors need to do their own research and due diligence. They can use reliable sources of information on the Internet to learn about companies, business prospects, management and financial statements. In addition, they may receive feedback from third-party websites to understand what others are saying about the project in question.
4. Think about the source of the buzz. Pump-and-Dump schemes are based on hype and increased urgency. The hype often comes from a third party, which could be through a newsletter or social media account. If you do not trust the source of information, this may be part of a fraudulent activity. In addition, investors should be wary of the "hot tips" often advertised by pump and dump scammers. They often survive on a heightened sense of urgency and fear of missing out (FOMO), prompting many potential investors to step in without checking the truth about the project.

How do Pump and Dump cryptocurrencies differ from those used in the stock market?

Pump and dump schemes can last for months on the stock market, but usually only last a few minutes on the cryptocurrency market. This makes it virtually impossible for anyone outside the participant group to participate. Pump and Dump on the stock market also usually includes some false information or actions, while it is rare in Pump and Dump for cryptocurrencies. In addition, it is easier to identify cryptocurrency pumps and dumps because they are advertised on social media.

While pumps and dumps are illegal on the stock market, Pump and Dump are largely unregulated on the cryptocurrency market. One reason for this is that most tokens are difficult to classify as investment or consumer goods, so they are clearly not subject to existing securities or consumer protection laws. Cryptocurrency regulation also requires more global coordination than with other assets, as tokens are typically traded around the world.

Conclusion

The Pump&Dump scheme could damage the image of the cryptocurrency in the long run. The lack of regulation on the cryptocurrency market gives rise to such practices. Therefore, it is best to conduct a detailed research on coins that will work in the long run, as well as find out the purpose of the coin before investing in them.

A new study shows that Pump and Dump cryptocurrencies lead to price and volume inflation that lasts only a few minutes, creating volatility that only benefits traders who are made aware of the scheme in advance.

The Pump&Dump scheme could damage the image of the cryptocurrency in the long run. Therefore, it is best for you to do a detailed research on coins that will work in the long run, as well as find out the purpose of the coin before investing in them.