What Is Pump & Dump in the Crypto Market: Key Things to Know in 2023

The strategy for making money on cryptocurrencies is simple: you need to buy coins cheaper and sell them at a higher price. Still, investors earn income in the cryptocurrency market in different ways. Some of them build their portfolio with reliable assets and patiently wait for several years until their value rises sharply.

At the same time, others do not want to wait for a natural increase in value and artificially boost the rates. This strategy is called Pump and Dump. Today, we’ll talk about it in more detail!

Key Features of the Pump & Dump Strategy

The features of Pump and Dump technology are clear from the name. The term ‘Pump’ means pumping — that is, the artificial creation of a stir or an increase in prices in relation to the stock or cryptocurrency market.

Accordingly, ‘Dump’ is the opposite action — that is, the activity of market participants aimed at reducing the value of an asset. Dumping the price means artificially lowering it for various purposes.

Schematically, this process looks like this:

- Someone posts information that you can participate in making money on various websites sites or in groups on social networks. Allegedly, someone has data on an increase in the asset’s price in the near future. So, you desperately need to buy this asset.

- As the demand for a certain asset grows, its price naturally increases as well. That is, the information posted is confirmed at first glance. Therefore, more and more people are involved in the process.

- As a result, the asset pumps up, and the price reaches its peak. But since the value growth is due only to artificial reasons, at a certain stage the boosted asset bursts causing its price to fall.

It would seem that the situation is beneficial for the participants. After all, you can buy crypto at a low price and sell it at the peak one. In fact, the organizers of this activity purchase hype coins even earlier. And they also sell it earlier than the rest.

In other words, the organizers of such artificial boosts enjoy the trust of naive users and steal their money. Therefore, such a strategy of making money in the stock, cryptocurrency, and other financial markets is considered illegal.

Why Boosting a Cryptocurrency Price?

The cryptocurrency market differs from the stock market by higher volatility. That is, strong price fluctuations are not surprising for investors. This is because crypto is not backed by tangible assets. Consequently, the value in the crypto market is formed only by the balance of supply and demand, as well as liquidity.

Only unpopular and little-known coins with a low market cap can be artificially boosted. Applying such technology for example to ether or bitcoin requires huge efforts and funds. But even in this case, the effectiveness of such activity is doubtful.

That is why most experts advise investing in reliable assets that have been on the market for a long time and have a high market cap. Investors in this case do not suffer from the manipulative actions of other market participants.

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Such a criminal scheme is well illustrated in the ‘The Wolf of Wall Street’ movie, which starred Leonardo DiCaprio. By the way, the plot of this movie is based on real events. The bottom line was that brokers offered buyers junk and useless shares.

Spoiler alert! These manipulations helped brokers earn money, but it all ended with an investigation of financial fraud and a prison for the organizers.

Cryptocurrency Pump & Dump Scams

Investing in crypto is a fairly new way to make money. A crypto asset itself appeared just over 10 years ago and became popular even later. Scammers constantly benefit from the lack of knowledge in this area, agitating newcomers to buy specific coins.

Fraud schemes related to new projects or startups are especially common. A pseudo-developer allegedly creates a promising blockchain platform and launches a native coin. Although the same scheme works for tokens. Further, scammers attract novice investors via aggressive marketing and promises of sky-high interest.

To increase the effect, a coin is pumped, which leads to an increase in its rate. Beginners fall for the bait scams since they see the alleged promise of the new platform and invest their own funds in it. The organizers collect investments and, of course, do not invest them in further platform development. They just take the money for themselves and simply disappear — of course, until law enforcement agencies find them.

Key Differences Between Pump and Hype

Do not confuse artificial boosts for fraud purposes and the hype that is spontaneously created around some cryptocurrencies for various reasons. Let’s consider a few situations as an example:

- DOGE memecoin. Nobody ever considered this crypto as a promising project. It was created only as a joke and dedicated to the meme dog. However, due to one tweet by Elon Musk, its value has increased dramatically. Of course, the head of Tesla did not have the goal of making money on this. Therefore, such actions cannot be considered illegal.

- Squid Game token. The creators of this coin did not artificially create a stir. They simply took advantage of the popularity of the Netflix series of the same name. As a result, the coin’s popularity became very high and it was quickly sold out. The creators took these coins and disappeared. So this is a classic scam.

Why Is Pump & Dump Strategy So Popular?

The cryptocurrency sphere is now practically not regulated by local or international legislation. Taking advantage of this, as well as the high natural crypto volatility, scammers began to use the Pump and Dump scheme with crypto.

Telegram and Discord are most often used to spread fake information about future coins’ growth. These messengers are quite popular and have mechanisms that allow administrators of fraudulent channels to remain incognito.

Now members of cryptocurrency communities are starting the fight against Pump & Dump. In particular, many centralized exchanges introduced liability for boosting asset prices. Users who are spotted in such actions are blocked with the freezing of existing assets and a subsequent investigation of fraud. Such rules, for example, were introduced by Bittrex.

Conclusion

If you apply the rules of risk diversification and invest only in reliable assets, the chances of suffering from a Pump and Dump fraud scheme are minimal. But this does not mean that investing in crypto is a risk-free activity. You should always be prepared to lose money. However, diversification allows you to cover financial losses by profiting on the price of other assets.