A pump and dump scheme is a form of securities fraud that involves artificially inflating the price of a stock via false and misleading positive statements, in order to sell it for a higher price.
More recently this type of scheme has also extended to the cryptocurrency space.
Subsequently, a group of individual or investors will buy up a crypto asset for a low price simultaneously, prompting the price to rise.
This abrupt and rampant increase in an asset’s nominal value will prompt unknowing traders to follow, whereby purchasing the asset in hopes of riding the momentum.
However, upon attracting additional investment, the original buyers then sell off the assets to turn a quick profit.
This sudden shift in supply and demand results in significant losses, especially for later entrants into the asset.
Understanding Crypto Pump and Dump Schemes
Pump and dump schemes are orchestrated by a group of organizers, often promoting a crypto coin through social media or other messaging platforms.
Often times, scammers will select a specific coin and an exchange to target with the aim of driving up the selected coins volume over a short period of time.
In most instances, the coin will have low volume, whereby allowing scammers to lock up as much of the available liquidity as possible.
In such a scenario, scammers are be able to fix the price whilst they sell off their newly acquired coins.
Pump and dump schemes can in theory be profitable for ordinary investors. This is quite rare however as usually the initial organizers or scammers are the ones reaping the profits.
This is due known information and the timing during which the pump and dump occurs.