What is a Pump and Dump Scheme in the Context of Crypto?
Wondering what is a pump and dump scheme? In this short post, we explain how these fraudulent schemes work and how to avoid them.
What is a pump and dump scheme?
A pump and dump (PnD) scheme is the process of artificially inflating an asset’s value by using false or misleading information in order to sell it at a much higher price.
The asset is always promoted with the help of marketing, which inflates the price (the pump).
Once the buyers take the bait and start investing, large bag-holders sell their coins at a high price making the price drop dramatically (the dump).
How does a pump and dump scheme work?
Pump and dump schemes are one of the major dangers for amateur cryptocurrency investors. It’s important to detect it early and avoid losses by buying in a PnD scheme.
PnD groups operate by convincing investors of an opportunity to get rich quick with some mostly-unknown cryptocurrency.
Misinformation is spread through social media, chat groups (especially Telegram groups) and sometimes even through well-known cryptocurrency news outlets.
In the background, scammers slowly acquire these coins for cheap. Once the price rises to a comfortable level, they crash the market and sell off their positions.
This leaves new investors with severe losses and cryptocurrency that is worth way less than their initial price.
Some important signs to look for that might indicate a pump and dump:
- Sudden interest in an obscure cryptocurrency.
- Suspiciously well-timed newsworthy events.
- The artificial increase in trading volumes.
Pump and dump examples in popular cryptocurrencies
Throughout the years, pump and dump groups have been quite active in the cryptocurrency markets. Some notable examples are:
- Bytecoin – from May 8 to May 10, 2018, the coin increased over 200% in value, only to see its price retrace by 250% a couple of days later.
- Quark – in January 2018, this crypto price surged 400% in just a few days, only to see its value drop back to the initial level shortly after.
- Matic – this cryptocurrency was considered a sound investment in the first part of 2019. However, at the end of the same year, the coin saw its price rise 200% in about 3 weeks. Unfortunately, these gains were wiped out by a huge dump on Dec 10 which only lasted a couple of hours.