"Pump and Dump"
Updated: Mar 1
Pump and dump? Have you ever heard this expression in the cryptocurrency world? While writing my previous blog entry, this term came up. I wrote about the crypto exchange Bittrex and how they were regulating their platform advising people to beware of pump and dump groups.
The pump and dump term caught my attention. According to Investopedia, “Pump and dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.”
This usually occurs with new crypto. These organized groups start by getting people to join them in the “false recommendations” on a specific coin. The group starts buying at a very low price and when the price goes significantly up because of a buying frenzy, they sell what they bought at a much higher price.
The U.S. Commodity Futures Trading Commission (CFTC) advises crypto investors “to avoid pump-and-dump schemes that can occur in thinly traded or new “alternative” virtual currencies, along with digital coins or tokens. Customers should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes. Thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from facts.”
Some say that pump and dump is not a scam but a tactic. Others say it's tricking people into worthless crypto. I believe that pumping up a coin is necessary; it’s just a matter of what your intentions are. When a coin is created, it has to gain popularity through the use of advertising in order to get recognition and people start buying it,
Many of these pump and dump and other scams are done with Initial Coin Offerings (ICO). These ICOs are new businesses trying to create cryptocurrency by having a good idea to back it up. To do this, they start by creating a project and getting people to invest in their business idea.
“Investing in an ICO won't result in you having an ownership stake of the company you're giving money to. You're gambling that the currently worthless currency you pay for will increase in worth later and make you money,” as stated in Investopedia. There are many ICOs that are legitimate and have had good results. Unfortunately, there are some that have been made just to scam people.
The crazy part of these scams is that there is no obligation for people to invest in these so-called projects or unknown crypto. I believe there is a responsibility from both sides. People are just willing to believe anything on social media or invest in anything. The best advice regarding this matter is that new investors must do their homework and take their time to find out how legitimate these ICOs are.
So, for me, pumping-and-dumping is done with the intention to make people believe a coin is worth more than it is, eventually cashing out and leaving everyone with a worthless coin. Even if this is a tactic for some crypto traders, it is illegal. Unfortunately, when you invest in crypto, or in general, there are always risks associated with it. People need to be aware of this, even more with digital currencies, where the market has very little or no regulations. False advertising is something that occurs in many other financial areas, so I believe there is no need to stigmatize new cryptocurrency.
Hope you enjoyed it! Feel free to comment.