What is Pump and Dump Crypto Trading?

What is pump and dump trading?

Pump and dump is the name of a scheme where an attempt is made to boost the price of a stock or security by fake recommendations. These recommendations are based on false or misleading statements and are used by those who have the asset to sell. They will sell it when the hype that the fake recommendations have created leads to the price of the asset going up – leading to a profit being made for them.

Is pump and dump trading illegal?

Pump and dump trading is illegal and can lead to heavy financial penalties being imposed on those found to have been involved in it. But the rise in popularity of cryptocurrencies has led to the sector attracting a large number of pump and dump schemes.

How does pump and dump trading work?

Historically, pump and dump has tended to be conducted through “cold calling’’, although the development of the internet has led to most of it now being carried out online. But whether it is done via phone calls, emails being sent or messages posted online, the basics of a pump and dump scheme remain the same.

Attempts are made to tempt would-be investors to put their money into a particular asset. Those running the scheme may often claim to have inside information about factors that are set to cause a sudden rise in value of the asset in question. The aim is to convince people to invest in that asset now, so they can seize the opportunity to make a profit when the price of it shoots up.

If those running the scheme are successful in convincing enough people to buy an asset so that its price rises, they will then sell all of that asset that they have. The effect of this can often be a sharp fall in the value of that asset.

While those who have run the scheme will have made a profit by selling all of the assets that they held, those who were persuaded to buy into it may often face heavy losses as they are holding assets that they overpaid for.

What is an example of cryptocurrency pump and dump trading?

1. A typical pump and dump scenario can be where a would-be scammer creates a new, low-value and low-volume cryptocurrency coin.
2. They then engage in aggressive ‘marketing’ schemes aimed at potential investors to build hype around the coin, making false promises of how brilliant the scheme is and how much the value is going to increase.
3. Once an adequate amount of investment has been received and the value of the coin has been artificially inflated, those running the scheme sell their share of the coins at an all-time high, which causes the value to plummet, leaving those who have invested suffering significant losses.

It is often the case that pump and dump schemes flourish where there is little or no regulation and not much information available about the asset in question. This enables such action to avoid scrutiny. Those running such schemes also tend to favour assets that have low trading volumes, as this means that they will not need too many new buyers to force the value of the asset higher.

Conclusion

There is little doubt that the cryptocurrency market has become very attractive to those operating pump and dump schemes. This is partly because reports of huge rises in value of the likes of Bitcoin and Ethereum have led to an eagerness to invest in crypto.

This eagerness, coupled with a lack of regulation of crypto and the often complex nature of such assets has led to many coming to the sector to operate pump and dump. Research has shown that there are thousands of these schemes in operation at any given time.