What Is Pump-and-Dump Scheme in Trading

What Is Pump-and-Dump: Basic Explanation

How Pump-and-Dump Works

  1. They purchase a new asset at a low price. It may be some ShitCoin (SHT) or “promising” microcap stocks (aka penny stocks).
  2. Then, they start promoting this asset using various means of communication, including word of mouth, cold calls, email newsletters, TV and radio ads, corrupt media, etc. They use phrases like “the investment of the year”, “the next big thing”, “the next Bitcoin”, and so on.
  3. Impressed by the disruptive potential of the shitcoin, many investors want to buy it. Like in the case of BTC, it seems a good chance to get rich fast. In the crypto community, this dream persists.
  4. In this manner, the frauds boost the demand for the coin and its trading volume. As a result, the price of the asset skyrockets at some point.
  5. The group of malicious players sell their coins/stocks and enjoy huge short-term gains. Unless this scheme lands them in jail.

Main Types of the Pump-and-Dump Schemes

  • Classic Pump-and-Dump
    We have already described it above. Frauds promote their penny stocks or “next bitcoins” through various communication channels new and old. Often, they lead people to believe it’s “inside information”.
  • “Boiler room” version
    In this context, a boiler room refers to a small call-center with a few dishonest brokers who sell penny stocks using the cold calling method. You might have seen it in the American crime drama Boiler Room. The goal of such brokers is to reach as many people as possible and to sell them “the next big thing”.
  • “Wrong number” method
    Here we deal with a relatively new modification. Suddenly, you receive a voicemail with “inside information”. Normally, it looks like investment advice from a friend who accidentally sent it to the wrong number. For many inexperienced investors, it looks like a happy coincidence. And needless to say, it’s not what it seems.
  • Such tricks look small, but they may be applied massively. As a result, you can see the effect on trading charts.

How to Detect a Pump-and-Dump Scheme

  • Some coin you have never heard of starts being massively promoted in social media (Facebook, Twitter, Medium, etc.)
  • The company behind the coin (or its promoters) have a bad or controversial reputation. Your research shows that they were involved in some kind of scandal or fraud. Or have unresolved issues with authorities.
  • The price of the coin grows on the background of intense promotional activity.
  • The articles that promote the coin mention the events that never took place or refer to something that does not exist or have no importance.
  • The company or group that promotes the coin has changed its name and other details more than once.
  • The promo campaign is targeted at low-income and low-education people. There are few or no technical details about the coin. Instead, they offer big promises and inspiring memes.
  • Normally, the message of the campaign boils down to “Don’t miss a unique chance to get multiple returns — quickly and without any effort”.
  • The promoters play on greed and FOMO.
  • The promises often look exaggerated or utterly ridiculous. Like 1000% return on your investment or a brand-new Lambo. To boost excitement, scammers use multiple exclamation marks.

How to Avoid Pump-and-Dumps

  • Educate yourself. The more you know about how cryptocurrency and trading works, the harder it is for scammers to persuade you to buy their shitcoins.
  • Control your excitement and FOMO. If some offer makes you feel you should grab this chance immediately, take your time to think about what value their coin has.
  • Look for the signs we listed above. If you have spotted more than one, it’s a huge red flag. Don’t ignore it.
  • Remember that cheap coins are cheap for a reason.
  • Watch out for the phrases that trigger excitement and make you act immediately.
  • Never buy anything before making research.
  • Don’t agree when somebody offers you to join a pumping group to make fast and easy gains. Normally, only the group organizers benefit from the scheme.

How Pumping Groups Work

What Is a Pump-and-Dump scheme: Conclusion



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