Pump-and-Dump Definition
A pump-and-dump scheme in the world of cryptocurrencies is a type of fraudulent practice where market manipulators artificially inflate the price of an asset (usually a less popular or thin-traded coin), “pump”, and then once the price has reached a certain level, they sell off their holdings to turn a profit, “dump”. This, in turn, results in the price crashing down, leaving the remaining holders in a loss.
Pump-and-Dump Key Points
- The manipulators often use social media platforms or messaging apps to hype up a certain cryptocurrency.
- They might share misleading or false information to pump the price.
- Once the price gets to a certain high point, they sell off their holdings, causing a plunge in the price.
- Ordinary investors who bought in during the pump phase often suffer significant financial losses.
What is Pump-and-Dump?
Pump-and-dump is a deceptive practice associated with the world of cryptocurrencies. In a pump-and-dump scheme, the market manipulators or fraudsters artificially boost, or pump, the price of an asset by spreading hype and false or misleading information.
Who are involved in a Pump-and-Dump scheme?
Fraudsters or market manipulators are the main actors in a pump-and-dump scheme. They are usually the ones who start spreading misinformation about the particular cryptocurrency. Sometimes, they may form or lead groups on social media platforms to gain more traction. Ordinary investors who unknowingly ride the wave during the pump phase and end up suffering a loss once the price dumps.
Where does Pump-and-Dump happen?
Pump and dump typically happens in lesser-known or thinly-traded cryptocurrencies. The manipulators often use social media platforms, messaging apps, or even cryptocurrency forums to spread hype and attract enough buyers for their scheme.
Why do Pump-and-Dumps occur?
Pump-and-dumps often occur due to the lack of regulation and transparency in many cryptocurrency markets. Fraudsters are attracted by the easy potential to manipulate the market price and the possibility to make quick profits.
How does a Pump-and-Dump operate?
In the initial phase, or the pump phase, manipulators start buying large amounts of a lower-traded coin and simultaneously spread positive and often misleading news about it. As new traders get drawn by the hype and start buying, the price artificially inflates. Once the price is high enough, the manipulators sell off all of their holdings, causing a sharp decline in the value. This is the dump phase. Traders who bought in during the pump phase end up in a loss as the price can often fall below the initial point.
