"Pump and Dump"
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 crypto exchange Bittrex and how they were regulating their platform and 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 and 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
Some say that pump and dump is not a scam but a tactic. Others say its 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 in order to get recognition and people to start buying it, through the use of advertising.
Many of these pump and dump and other scams are done with Initial Coin Offerings (ICO). These ICO´s 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 now will increase in worth later and make you money”. There are many ICO´s that are legitimate and that 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 buy into these so-called projects or unknown crypto. I believe there is responsibility from both sides. People are just willing to believe anything on social media or invest in anything. The best advice given online regarding this matter is that new investors must do their homework and take their time to find out how legitimate these
So, for me pumping and dumping is done with the intention to make people believe the 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 investing in crypto or in general there are always risks associated with it. Even more for 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, feel free to comment.