What does pump and dump mean in cryptocurrencies?

How do pump and dump scams work in crypto?

First of all, a group of people get hold of a large percentage of a certain cryptocurrency development either by creating it or by buying a large amount. In the next step, they use different marketing strategies to popularize the currency and make many people buy it, increasing its price.

Is pump and dump legal ?

The act of manipulating investors through false information is illegal and punishable by fines, penalties and even imprisonment. In the United States, the body in charge of regulating financial fraud is the Security and Exchange Commission (SEC) and it recognizes pump and dump schemes as financial fraud.

How do pumps and dumps usually develop in crypto?

These schemes mutated over the years to adapt to changing market conditions. In the strong bull market of 2017, with the great popularity of Initial Coin Offerings (ICOs) , this was the scam method par excellence.

  • They were writing a white paper detailing the incredible potential of a new protocol that was going to hit the market.
  • They executed a marketing campaign publicizing this innovative project.
  • They did an ICO and sold project tokens.
  • Once the money was obtained, they abandoned the project and disappeared.

How to avoid getting into a pump and dump ?

Here are some tips to avoid falling for these scams:

  • Avoid getting carried away by FOMO : Much of the effectiveness of scams like these is based on causing FOMO (Fear Of Missing Out). This is a very common feeling in bull markets where we see that some coins multiplied x10 or x100 their price, and we do not want to miss the next opportunity. Any advertising that encourages you to act quickly is suspicious.
  • Check the news from reliable sources: It is common that, within the advertising campaigns, these platforms invent that they are associated with large companies or that they are backed by well-known exchanges . To verify this, it is advisable to look for an official statement from that cryptocurrency development company or exchange that confirms it. Last year, for example, a fake news spread saying that Walmart was going to accept payments with Litecoin. This was raised by large media outlets and caused the price of LTC to rise by more than 20%. Hours later the news was denied by Walmart.
  • Be careful with unsolicited messages: Being within crypto communities and being active on networks such as Twitter, Telegram or Discord, it is very common for direct messages from strangers to reach us. Most are to tell us about an investment platform that pays high interest rates or some project that is supposedly about to be exploited. Needless to say, 99% of those messages are scams.
  • Beware of pump and dump groups: Surprising as it may seem, there are entire groups dedicated to pumping and dumping different currencies. They usually tell you to buy such a coin because they are about to promote it and you can earn 300% or 400%. Apart from being unethical, it is false. In these cases, the same members of the group are the ones that are causing the rise and soon the organizers are going to sell all their coins and the price is going to crash.



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