Pump and dump schemes are fraudulent practices that involve artificially inflating the price of a stock or a cryptocurrency, and then selling it at a high profit. The perpetrators of these schemes usually have a large amount of the asset, which they acquired at a low price. They use various methods to create hype and demand for the asset, such as spreading false or misleading information, making exaggerated claims, or paying for positive reviews. They also use social media, online forums, chat groups, or newsletters to attract unsuspecting investors, who are lured by the promise of quick and easy returns. As more and more investors buy the asset, the price rises rapidly, creating a bubble. This is the pump phase of the scheme.
How They Work
Once the price reaches a certain level, the perpetrators start to sell their holdings, often in a coordinated manner. This causes the price to drop sharply, leaving the investors with worthless or devalued assets. This is the dump phase of the scheme. The perpetrators make a huge profit, while the investors suffer huge losses. Some investors may not even be able to sell their assets, as the market becomes illiquid or the trading platforms become inaccessible.
Pump and dump schemes are illegal and unethical, as they manipulate the market and defraud the investors. They also damage the reputation and credibility of the legitimate companies or projects that are involved. However, pump and dump schemes are difficult to detect and prevent, especially in the unregulated and decentralized markets of cryptocurrencies. Therefore, investors should be careful and vigilant, and avoid falling for these schemes.
Signs and Red Flags
- The asset has a low market capitalization, low trading volume, or low liquidity, which makes it easier to manipulate.
- The asset has a sudden and sharp increase in price, without any fundamental or technical reason.
- The asset has a lot of hype and publicity, often from unknown or unreliable sources, such as social media influencers, celebrities, or self-proclaimed experts.
- The asset has a lot of positive reviews, ratings, or testimonials, which may be fake or paid for.
- The asset has a lot of pressure or urgency to buy, such as limited time offers, countdown timers, or scarcity claims.
- The asset has a lot of promises or guarantees of high returns, low risks, or future potential, which may be unrealistic or unsubstantiated.
How to Stay Safe
To avoid becoming a victim of a pump and dump scheme, investors should do their own research and due diligence before investing in any asset. While it is possible to trade and profit from meteoric rises in price, it takes a lot of skill and experience to do so consistently. So if you’re a beginner, it might be best to stay with liquid and safe stocks until you’re ready to dabble into the high-risk side of trading.
