Pump and Dump Crypto: Definition, How it Works, and History

Bittime - The cryptocurrency market has attracted the attention of many investors, both individual and institutional, in recent years. However, this increase in interest has also been accompanied by the emergence of scams that seek to exploit gaps in the psychology of market participants and a lack of regulation.

Pump and Dump Scheme: Promise of Results But Deception

Fraud in the crypto world can be likened to hidden landmines—one wrong move, and you may never see your money again! Among the various types of fraud, pump and dump schemes are one of the most detrimental, promising very high returns through fraudulent means.

What is a Pump and Dump Scheme?

A pump and dump scheme is a market manipulation scam in which a perpetrator creates or acquires a large number of altcoins, promotes them to fraudulently increase the token price (pump), and then sells them (dump) to unsuspecting investors. When actors sell their tokens, the supply increases while the price decreases. 

Because many of these assets have little or no value, their prices will not recover once the fraudsters sell their holdings. As a result, innocent investors are stuck with tokens that are virtually worthless, while fraudsters count their profits.

History of Pump and Dump Schemes

Pump and dump schemes do not only occur in the crypto world; they have roots in traditional finance that can be traced back to the South Sea Bubble event of the early 18th century. In fact, the King of England, George I, bought shares of the South Sea Company during the pump period. When the bubble burst in 1720, many investors, including Isaac Newton, became victims.

Jordan Belfort 

Over time, pump-and-dump scammers have adapted. Jordan Belfort, the main character in the film 'Wolf of Wall Street', was jailed for pumping and dumping penny stocks via cold calling. Today, with regulatory loopholes in place, crypto fraudsters are taking advantage of the internet and anonymity to defraud investors. 

Almost 25% of Tokens Indicated Pump and Dump

According to Chainalysis data, 24% of all new tokens launched in 2022 showed signs of being pump-and-dump schemes, with investors spending $4.2 billion to buy the tokens, while fraudsters made profits of $30 million.

How the Pump and Dump Scheme Works

Pre-Launch Phase: Create Fomo

Pump-and-dump schemes rely on marketing around relatively worthless tokens. Hype is key—the higher the hype, the more investors buy in, thus benefiting the fraudster. They usually build a sense of FOMO (fear of missing out) through platforms such as X (formerly Twitter), Discord, and Telegram.

Launch: The presence of Shillers

Leading up to the launch, fraudsters used "shillers" to attract more potential victims. Shilling in crypto refers to the promotion of a token or coin—usually by those with large followings on social media—to increase its perceived value.

Pump: Asset Prices Skyrocket

After a list of victims purchased tokens, the price of the asset began to skyrocket. At this point, those who missed the pre-sale feel pressured to buy, which is precisely what the scammers want.

Dump: Asset Prices Slammed

Once the token price reaches a level deemed profitable, fraudsters simultaneously sell their holdings. This massive sale caused token supply to far exceed demand, causing prices to plummet. Panicked investors tried to sell, but it was too late; The token has no value.

Read too Understanding Pump and Dump Crypto

How to Identify Pump and Dump Scheme “Red Flags.”

To avoid getting caught in these schemes, it is important to recognize the red flags that indicate fraud. you don't need to have deep technical knowledge; just be careful.

Token Allocation

Check how and where tokens are allocated. You don't want to buy an asset where most of the tokens are allocated to one centralized entity, as this could lead to a costly mass sale.

Token Founder Reputation

The reputation of the project founder is very important. Find out whether they are transparent about their identity and previous projects, as well as whether they have a good track record of building legitimate projects.

Suspicious Social Media Activity

Pay attention to the project's social media activity. Many pump and dump projects may disable comments to avoid negative feedback. Additionally, check the follower and engagement ratio; if it seems unbalanced, it could be a sign of false engagement.

Read too US DOJ Charges 4 Companies for Alleged Meme Coin Market Manipulation

Pump and Dump Scheme from a Legal Perspective

Pump and dump schemes in the stock market are illegal in many countries, including the US and EU, where securities laws prohibit them. However, crypto fraudsters often use anonymity to evade authorities, and crypto remains in a regulatory gray area in many places.

As an investor, it is important to use data and logic, not emotion, in making investment decisions. Relying on emotions can lead you into traps like pump-and-dump schemes.

Conclusion

Pump and dump schemes are scams that have been around for a long time, but with advances in technology, they have become increasingly sophisticated and difficult to detect. With the right knowledge and vigilance, you can protect yourself from these scams. Using a tool like Ledger Ecosystem can help you better manage and track your assets, providing additional security when exploring the world of crypto.

FAQ

1. What is a pump and dump scheme in cryptocurrency?

Answer: A pump and dump scheme is a market manipulation practice in which fraudsters buy large amounts of altcoins, then promote them to artificially increase the price (pump). Once the price rises, they sell the tokens (dump) to unsuspecting investors, causing the price to plummet and leaving investors with almost worthless assets.

2. Are pump and dump schemes legal?

Answer: Pump and dump schemes are illegal in many countries, including the United States and the European Union, where securities laws prohibit the practice. However, because cryptocurrencies remain in a regulatory gray area, fraudsters often use anonymity to evade law enforcement. As an investor, it is important to always do research and use logic in making investment decisions.

How to Buy Crypto on Bittime

Want to trade sell buy Bitcoins and crypto investment easily? Bittime is here to help! As an Indonesian crypto exchange officially registered with Bappebti, Bittime ensures every transaction is safe and fast.

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Also, visit the Bittime Blog for interesting updates and educational information about the crypto world. Find reliable articles about Web3, blockchain technology, and digital asset investment tips designed to enrich your crypto knowledge.

Reference

Missing Das, What Is a Pump and Dump?, Accessed January 14, 2025

coinmarketcap, What is dump?, Accessed January 14, 2025

Author: IN