What is a Crypto Pump and Dump Scheme? Are they Legal?

What are crypto pump and dump schemes?

A crypto pump-and-dump scheme starts by enticing individuals to purchase a digital asset. The pumping takes place when the propagators publish misleading information about the potential of the asset. When individuals and investors flock to the market to buy the asset, the price rises. Once the asset hits a sky-high price, the propagators sell all the stocks and disappear with investors’ money. Crypto dump and pump grew in popularity around cryptocurrency. 

Alternatively, pump-and-dump actors might decide to pump the price of any asset in the market. The actors pick a digital asset, mostly low-cap crypto. This means the asset is usually traded on a flat and such a trend cannot easily capture the attention of the majority of investors. Another advantage of the low-cap coin is its cost of only a few dollars cents. 

How do pump and dump schemes work?

The pump actors buy the asset in low volumes to avoid causing a market frenzy. Along the process of acquiring the cryptocurrency, the actors plan and relay an excellent marketing strategy. The marketing takes place either offline or online. The marketing team’s vision is to persuade individuals the coin will generate future yields. And within no time, the digital asset attracts the attention of the crypto ecosystem.

More people begin acquiring the coin. The pump actors also buy in and they buy in large volumes at this point. Thereby causing the price of the asset to jump. Since most of the marketing message is packaged around FOMO, even those traders that had been watching from the sidelines could choose to buy in. In the long run, the price of the asset goes up. At this point, this is usually the first wave of the crypto pump and dump scheme.  A characteristic of the first pump involves large-scale buying of the token. 

The end of the first wave ushers in a period where the pump organizers allow the price of the coin to fall to a reasonable minimum. Afterwards, they repeat the process of the first wave. This time the price is pumped even higher and more traders become more interested. When the prices hit peak levels, the pump organizers sell their tokens and generate considerable profits.

There are two types of pump and dump strategies, short and long-term pumps. Each of these has its own distinct goals. A short-term pump aims to make a profit within one instance, the marketing stage takes place within a few months. The long-term pump could take a year or two for the scheme to become successful. Besides, the longer the period of organizing a pump and dump scheme, the higher the profit goal. A long-term pump usually takes place in different waves, each wave being a high surge and a reasonable plummet. 

Pump and dump operations have existed in economic capital markets since the 1700s. Interestingly, “Are crypto pump and dump legal?” is a popular Google search query. Why would anyone engage in a debate about the legality of an operation founded on false information and manipulation? Mainly because the legal limbo for cryptocurrency has not yet grown. Pump-and-dump operations are illegal across the stock market. The schemes are however not encouraged across cryptocurrency, despite some Telegram and Discord communities posting pump signals to influence the price growth of low-volume coins. However, unlike a scammer’s pump-and-dump scheme, these groups might not lay out a marketing strategy based on manipulation and deceit.

A most recent incident of a pump and dump is the 2021 $SQUID Game coin. The organizers created a shitcoin that had nothing to do with the popular Netflix show Squid Game. To create buzz around the new coin and trigger market participation, the organizers named the coin after the show. This resulted in a dramatic soar from only a few cents to $2,800. After hitting the high point, the coin dropped once again to a few cents. Thereby raising the alarm of yet another crypto pump and dump. 

What is the difference between pump-and-dump schemes and a rug pull?

You are going to hear both pump and dump schemes used interchangeably with rug pulls. Both terms describe the same thing. Think of a pump and dump as a way of figurative rug-pulling behind the backs of the investors. Therefore resulting in a dramatic market crash. 

Popular starting points of pump and dump scams include Discord channels, Telegram and Twitter. Since the scam is meant to generate a large amount of curiosity and hype, using social media posts is the best way to get started. Remember the vision of the marketing strategy is promising lots of future yields within a small amount of time. Paid social media ads put little consideration in due diligence, hence leaving the responsibility fully in the hands of the audience. 

Also, note that self-organized teams could conduct an online pump-and-dump scam. The operation occurs in plain sight of the public, usually across Discord servers. Anyone interested to take part in the operation can join. This is because the servers or groups are open to anyone without prior consent. The groups usually comprise a hierarchy of leaders or admins and members. Information is disseminated depending on rank. High-rank members usually receive notifications earlier on and get information about the target coin. Low-rank users might get the notification a little bit later on. I bet this is a way of ensuring the operation is successful during the first stages. However, the high-rank member has a high chance of buying the asset at a lower price and making greater profits afterwards.

It could also happen that the organizers purchase the service of a celebrity or influencer.  Someone with a significant social media presence. The scammers then pay the influencer significant amounts of money and the influencer goes on to create hype around the asset. For most traders, an influencer in the picture is enough to catalyze FOMO and drive buy-ins. 

Scammers also employ the pyramid affiliate system to ignite the quick progression of the pump-and-dump scam. When members recruit new members, they rise in the hierarchy as well as promise high gains. One’s rating rises proportionately to the number of members they added to the system. To simplify the hierarchical system, some organizers go for only two levels, VIP and common members. The cost of joining pump and dump schemes is paid in BTC or ETH. 

It is important to mention crypto pump signals

Crypto pump signals are trading messages meant to entice traders to purchase a crypto asset for them to profit from eventual price manipulation. The price manipulation is meant to trigger a sudden uptick in the demand for the coin. Such signals ignite investor interest, and more people get curious about the coin. This drives purchases high and hence the price of the asset. At this point, the group organizing the pump disseminates a dump signal and the members begin selling their holdings at a profit. 

Crypto pump signals usually take the following format on either Telegram or Discord: 

How to spot a pump and dump scheme?

New coin

Remain cautious about new coins. Conduct effective due diligence by going through the whitepaper and the team of founders. There will be fewer to no reviews about the coin online because the coin is new. The research you conduct counts a lot in whether you get dupped or not. Any coin or token is built to solve a particular problem. Take your time to understand whether that problem exists and whether the coin has any intrinsic value. Do not just take the word of sponsored Facebook posts or rely on the signals of a Telegram group. This could go against you.

Celebrities and influencers 

It is not every time that a celebrity or influencer advertises a cryptocurrency incessantly. Such personalities have little to no knowledge about crypto and are mostly paid to hype up the coin. Also, they are fewer chances that the influencer or celebrity is backing up the project as an investor. Do not rely only on their word. Research beyond the hype and avoid becoming the victim of a scam. Remember that the influencers or celebrities might not have the idea they are being part of a scam. All they do is post-pre-written articles and pre-made videos on their profiles for pay. 

Copypasted social media posts 

Identical messages about a new cryptocurrency on Discord groups or social media channels are a big red flag. Such messages are a good tell-tale sign of scammers’ deliberately trying to influence mass investor behaviour. Remember a lot of them are paid posts and paid advertising. Take note that a person intending to share information about a newly discovered coin will do it organically and naturally. They will also share the information across one or only a few groups.  Good blockchain technology gains traction naturally, and there are usually no poorly-written posts. 

Aggressive advertising

Scammers do not rely only on social media posts to back up their scams. There are chances of noticing an aggressive ad campaign. If you note such a campaign for any coin, take time to conduct further research. You might be inside a big scam operation without knowledge. The first place to begin is to check the founding team and each individual’s Linkedin profile. A good project first invests in developing a legitimate quality product. It is not feasible to stage an aggressive marketing campaign for a new low-cap coin. Therefore, always be careful about coin advertising all over Google, Facebook, Youtube and other media platforms. Price speculation and FOMO messages around advertisements and posts are other red flags. 

Sudden price hikes for a little-known coin 

The pumping phase of a pump-and-dump scheme begins by manipulating the price of the coin to hit peak levels.  Large numbers of people come in and buy the asset in large volumes as they speculate high future yields.  This action causes a sudden hike in the price of the asset. Such an incident is a good sign of a pump-and-dump scheme.