Pump And Dump Scheme: How Does It Operate?

The pump and dump scheme is something that exits in various markets like stocks, crypto, NFTs and various others.

The potential high returns of the cryptocurrency world attract seasonal investors and enthusiastic newcomers.

However, among many genuine projects and technologies lies the deceptive practices of pump and dump schemes.

What is a Pump and Dump Scheme?

The pump and dump scheme operates by coordinated efforts to inflate the price of a specific cryptocurrency or NFT artificially.

The Pump:

• Scammers invest in the low-value NFT, or cryptocurrency.
• Scammers then start pumping out misleading promotions and advertising to lure more investors.
• Investors start investing in that cryptocurrency mostly based on fear of missing out (FOMO).

The Dump:

• Once the price of a share starts rising, perpetrators start selling those shares at an inflated price.
• Crypto coins start losing value once the perpetrators start selling shares in large amounts, creating a panic in the whole market.
• Lateral investors are left with zero-valued crypto coins, or NFTs.

Let’s take an Example of a Pump and Dump Scheme.

An entity holding 30,000 shares in a crypto coin for $5 per share is looking to do the pump and dump scheme.

That entity will start spreading all the positive but misleading news about the crypto coin to lure more investors.

As the misleading promotions spread, more investors will start buying, raising the value of shares by 100%.

When prices have risen to the level the perpetrators feel is enough, they will sell all the shares at that inflated price, gaining a good portion of the profit.

Of course, the practice of the pump and dump scheme is illegal but continues to flourish because of greed for a quick cash grab from people.

Identification of Red Flags

• Extra Hype: Out of many red flags, the most common indication is too much hype about a particular crypto or NFT.
• Anonymous Background: If the team behind a project is hard to trace and very little information is available online, then clearly it’s a red flag.
• Unrealistic Growth Promise: Most fake projects often promise huge returns on investment that are too good to be true.
• Scrutiny: Vague whitepaper, low online presence, and media coverage are clear indications of a red flag.

5 Types of Pump and Dump Schemes

1. Social Media Echo

The classic method in today’s world is where perpetrators pump coordinated fake hype across different social media platforms like Reddit, X (Twitter), and Telegram.

Bots, influencers, and paid shills flood social media with manipulative news, good reviews, and unbelievable promises.

The aim is to drive up the price of shares before dumping their shares at inflated prices.

2. The Whale Manipulator

Whale exists in the majority of cryptocurrencies, and this poses an advantage for manipulative practices too.

A single large investor (whale) can strategically buy and sell giant amounts of low-liquidity coins.

This creates an artificial growth in which other investors also fall by mistaking it for a genuine one.

3. Collaborative Market Orchestration

The manipulative scheme requires multiple parties, where one group is online influencers and anonymous profiles that generate significant hype for crypto.

Meanwhile, the other groups working on low-profile projects accumulate a large portion of the share.

Now, when the online hype has peaked, the second group dumps the holdings, causing prices to crash and leaving other investors with nothing.

4. Wash Trading

This activity involves the creation of a fictional trading activity by constantly buying and selling the same coin from multiple accounts.

This is done to artificially manipulate the trading volume and market activity in positively high numbers.

Positive numbers attract and mislead newbie investors into investing, then the manipulator offloads their shares at inflated prices.

5. Rug Pull Scam

This trickery works under the disguise of a legitimate scheme; perpetrators lure investors with fancy, promising whitepaper and eye-pleasing websites.

Once enough funds are collected, the perpetrators then disappear in thin air.

The project gets abandoned, with profits for the fraudsters but nothing for investors who trusted the project.

Three Instances of the Pump and Dump Scheme in the Crypto and NFT World

1. Squid Token (2021)

Inspiration came from the popular Netflix series ‘Squid Game’. This token made a promise to investors of a play-to-earn gaming concept.

However, the developers of the squid token were anonymous, and the whitepaper had many grammatical errors.

Moreover, the smart contract had a backdoor that enabled investors’ funds to be stolen.

After huge promotion and social media hype, the ‘Squid’ price went to $28 but quickly fell to nearly zero in minutes, making huge losses for the investors.

2. EthereumMax (2021)

A good example of famous celebrity-driven hype that ultimately benefited the celebrities, but genuine investors were the ones who lost a large amount of money.

Allegedly, this pump and dump scheme benefited Floyd Mayweather and Kim Kardashian because they were part of the promotion.

An investigation revealed that influencers were paid for the endorsements they had to show on social media.

The creators behind this project were also involved in the pump and dump scheme earlier. The price of EthereumMax fell by 99% after legal action.

3. Frosties (2023)

This NFT project created hype on social media by promising utility, partnerships, and many more fake promises.

But those promises were short-lived as the creators behind this abandoned the project right after its launch and also deleted the Discord server.

The investor funds were all gone in just a short period of time.

Conclusion

This article should serve as a stark reminder to do proper research before investing any amount of money anywhere.

The pump and dump scheme is only one of the many fraudulent schemes, but it is quite popular because social media serves as the perfect way for it to function in today’s world.

Frequently Asked Questions

Q1: What is a pump and dump scheme in investing?

A1: A pump and dump scheme involves artificially inflating stock prices through false or misleading information, followed by selling the stocks at a profit once the price has risen.

Q2: How do the people manipulate stock prices in a pump and dump scheme?

A2: Participants in a pump and dump scheme use various tactics like spreading rumors, false promotions, or fake news to create excitement and entice others to invest, leading to an artificial increase in stock prices.

Q3: What are the typical warning signs of a pump and dump scheme?

A3: Red flags of a pump and dump scheme include unsolicited investment advice, aggressive marketing tactics, sudden price spikes, low trading volume before the increase, and high-pressure sales tactics.

Q4: Can investors make money participating in a pump and dump scheme?

A4: While some individuals may profit by selling their stocks early in a pump and dump scheme, the majority of participants, especially those who enter late, are at a high risk of losing money when the scheme eventually collapses.

Q5: How can the investors protect themselves from falling victim to pump and dump schemes?

A5: To avoid pump and dump schemes, investors must conduct thorough research, be skeptical of unsolicited advice, follow legitimate news sources, diversify their investments, be cautious of sudden stock price spikes, and consult with a trusted financial advisor.