What is Pump and Dump
A pump and dump is a fraudulent scheme that seeks to artificially inflate the price of a cryptocurrency through misleading or exaggerated statements, typically disseminated via social media or online forums. Once the price has been driven up by the buying frenzy, the perpetrators sell off their holdings at the inflated price, leaving other investors with losses as the price plummets. This practice is illegal in traditional securities markets and is increasingly scrutinized in the cryptocurrency space.
The origin of the term dates back to stock market manipulation in the 1980s, where unscrupulous traders would promote low-value stocks to create a surge in interest and price. In the realm of cryptocurrency, such schemes have gained notoriety due to the relative lack of regulation and oversight compared to traditional financial markets. This has made it easier for bad actors to exploit unsuspecting investors.
What are the types of Pump and Dump?
Pump and dump schemes can vary in execution, but they generally fall into two main categories:
Group Pump and Dumps: These involve a coordinated effort among a group of traders who buy a specific cryptocurrency simultaneously to create an artificial price increase. For example, groups on platforms like Telegram or Discord often organize these schemes.
Social Media Pump and Dumps: This type relies heavily on social media platforms where influencers or anonymous accounts promote a cryptocurrency, exaggerating its potential to attract new investors. An example is when a popular influencer tweets about a lesser-known coin, resulting in a spike in trading volume and price.
How does Pump and Dump work?
The mechanics of a pump and dump scheme typically involve a few stages. Initially, promoters will select a low-market-cap cryptocurrency that they believe can be easily manipulated. They will then purchase significant amounts of this cryptocurrency, creating a sense of demand and interest.
Simultaneously, they will spread hype through social media, forums, and chat groups, claiming the coin is set to explode in value. As new investors, often unaware of the scheme, begin to buy into the cryptocurrency, its price rises dramatically. Once the price reaches a predetermined level, the promoters quickly sell their holdings, leading to a sharp decline in price as the buying frenzy subsides, resulting in significant losses for the latecomers.
Where is Pump and Dump used?
Example 1: In a recent incident involving the cryptocurrency "XRP Classic," a coordinated group effort on Telegram led to a 300% price increase within 24 hours, only for the price to crash back down shortly after the group sold off their holdings.
Example 2: A notorious pump and dump scheme in 2021 involved the token "Shiba Inu," where influencers on Twitter promoted it heavily, resulting in a trading volume surge of $2 billion before the price fell by 80% over the following week.
Example 3: The "SafeMoon" cryptocurrency saw a pump and dump scenario where its price skyrocketed by 1,000% in just a few days due to mass promotion, followed by a significant drop as early investors liquidated their assets, leading to a market cap reduction from $4 billion to $1 billion in under a month.
