• The pump and dump scheme is a form of market manipulation in which a party or parties create interest in an asset that inflates its price while holding it
• They eventually dispose of the asset and make an undeserved profit leaving others who gave in to the manipulation holding an asset that usually quickly loses value
• The crypto pump-and-dump scheme is complicated and somewhat sophisticated, but there are still things we can look out for. The following things can help you spot a pump and dump in action

The more things change, the more they stay the same. Cryptocurrency, as the leading product of blockchain technology, has promised to change much in the world and how we look at money. However, cryptocurrency has failed to change some of the nefarious practices that have happened with money and assets in the past. Instead, technology has brought a new dimension to age-old scams. One good example of this is the age-old pump-and-dump scheme which continues to enjoy relevance in the modern world of cryptocurrency. The ability to identify a pump-and-dump scam and hence avoid it could save your hard-earned money or cryptocurrency.

Pump and dump schemes

The pump and dump scheme is a form of market manipulation in which a party or parties create interest in an asset that inflates its price while holding it. Through this manipulation, the value of the asset increases. They eventually dispose of the asset and make an undeserved profit leaving others who gave in to the manipulation holding an asset that usually quickly loses value. In pump-and-dump schemes, the manipulator can use public platforms to spread hype about the asset.

First, the pump, then the dump

Pump and dump schemes, as the name suggests, have two stages. The pump is the act of increasing the price of the asset. This stage can further be broken down into first seeding publicity about the asset and then pushing up the price. This usually sharp price increase confirms the publicity that other market participants have come across. These participants then move to buy the asset, assuming that the price action is genuine and this demand increases the price. As the price rises, the manipulator sells off their holding at these inflated prices and pockets a fantastic profit. This is the dump. Sooner or later, the lack of fundamentals catches up with the asset in the market, and it returns to its actual value.

Pump and dumps are not new

While the history of pump-and-dump scams can be traced to stock markets, it’s conceivable that they existed long before any stock markets, and indeed, modern ones existed. At its heart, the pump-and-dump scheme convinces a group of people that an asset is worth more than its current price in the market. The practice was popularised with smaller stocks on exchanges that received much less regulatory attention. The scam was initially practised by leaving unsuspecting participants “hot tips” via mail or telephone. These smaller (penny) stocks also made excellent marks because they tend to have low trade volumes, and the gains would be a fraction of a penny, therefore, attracting little attention.

Crypto pump-and-dump

The crypto pump-and-dumps have the same hallmarks as the traditional pump-and-dump scam, but it adds some special features that are unique to the fast-paced world of web3 technology. The first is the power of tail ending – a term coined in the internet age that shows the power of the internet. The open nature of cryptocurrency means a broader range of participants is available. Where traditional stock markets are mainly limited to a single jurisdiction, cryptocurrency markets are open to the whole world. This means that something that would generally have the interest of 50 people in one country is open to around 10000 people, assuming 50 people in 200 countries.

The second feature unique to the crypto pump and pump scam is the speed at which things happen in web3. The traditional pump and dump can happen over days or weeks. The crypto pump and dump can occur in minutes to an hour. Crypto markets are much faster, with the most focus on hourly rather than daily moves.

The third feature that makes the crypto pump-and-dump different is the lack of regulation in crypto thus far. This, coupled with anonymity in trades in capital markets, gives rise to the sort of pump-and-dump scheme that has become very popular in cryptocurrency.

Cryptocurrency Pump-and-dump scheme groups

There are reports of organised groups that initiate pump-and-dumps. Users will come together in a forum or group chat on a platform such as WhatsApp or Telegram and coordinate the pumping and dumping action. It works very well because the victims will see multiple trades pushing up the cryptocurrency’s price. This will be coordinated with messaging suggesting the crypto is about to rise dramatically in price (moon). Victims try to take advantage of the rise, where the manipulators sell off their crypto at higher prices to interested buyers willing to pay a premium for a hot asset.

How to identify a crypto pump and dump scam

The crypto pump-and-dump scheme is complicated and somewhat sophisticated, but there are still things we can look out for. The following things can help you spot a pump and dump in action.

Who are the Promoters

When you see people promoting a cryptocurrency, it’s important to scrutinise these promoters. Especially when this is followed by strange price and volume action.  Unlike traditional markets, crypto markets are not yet regulated on who can give advice, but you can almost always rest assured that any unsolicited tip should be treated with suspicion.

Sharp rise in trade volumes

The trade volumes are another thing to look out for. As mentioned, trade volumes also tend to spike unexpectedly with pump-and-dump schemes. The trick is to compare long-term trade volumes to short-term trade volumes. Pump and dump schemes are almost always coincidental to sharp trade volume increases.

Have the fundamentals changed

This is easier to understand in the traditional finance world. It still plays a part in the crypto pump-and-dump world. All markets react to news or expectations, and price movements should be backed up by material information coming to light. And this should be combined with the next tip.

DYOR

The popularised acronym for the instruction to “do your own research”. Pump and dump scams will litter the internet with information that supports their pump action. You should always verify the information you see or receive rather than believe it off-hand. This tip helps investigate any suspected scam.

Look Out for Affinity Fraud

Affinity fraud is a targeted fraud action that singles out a homogenous group that can easily be identified. You can see how this would work with a pump group that targets a popular platform or social media space. The goal here is to entice a particular group of identifiable victims. Traditional pump-and-dump schemes targeted people close to retirement.  Such people would be intrigued by the opportunity to boost the value of their savings. To verify that you are not targeted by affinity fraud, look for similar messages in other spaces.

The pump and dump scheme is, for the lack of a better term, a classic. It seems scams and scammers have also crossed over into the new technology space that is cryptocurrency. The advent of cryptocurrency has brought nuanced differences that make it harder to detect scams. However, the more things change, the more they stay the same.