Although we are currently in a bullish cycle within the stock and crypto markets, the biggest downside is that certain people and groups create pump and dump schemes to profit off unsuspecting investors and newbies. Within this article we will explain how a pump and dump scheme works and what exactly to look for to ensure your money is safe.
What is a Pump and Dump Scheme?
Pump and dump schemes have been around since the stock market has existed however pump and dump schemes were more prevalent within penny stocks and low cap market stocks. Essentially a group or individual purchases shares or stocks in a company that has a low market cap and creates hype or provides false and misleading information causing mass people to purchase the stock. Due to mass people purchasing the stock this causes the company’s share price to rocket, the individual or the group will sell all their positions making the share prices dump in price.
Due to crypto being unregulated compared to the stock markets, technically it is legal to orchestrate pump and dump schemes until the crypto markets become regulated. This is scary as potential alt coin buyers and investors could be caught off guard buy purchasing a worthless low cap coin.
Pumping and dumping is illegal and you can be charged with securities fraud by misleading investors, the notorious movie Wolf of Wallstreet explains the challenges and consequences of these actions and is a great film to watch if you’re interested in how pump and dump schemes take place.
Spotting a Pump and Dump Scheme
To start with individuals and groups that creates these schemes usually target coins that have a low market cap, they target these types of coins as there is low trading volume which means when people purchase it causes the price of the coins to skyrocket. As such when trying to spot these schemes try to see if there is any purchase volume spikes that look out of the ordinary, if there is no significant news event or real reason for the spike it is best to just stay away.
If you also see tremendous hype regarding a coin you’ve never heard of on social media where influencers are hyping up a specific coin be sure to do your research, usually on these posts it will say #ad or #sponsored meaning the influencer is paid to promote and say good things about these coins to their followers. Be sure to do research into these coins before purchasing as these influencers can just be hyping up coins for monetary purposes.
The main social media platforms where fake hype is created in the crypto markets can be seen:
- Tik Tok
- Youtube sponsored ads
- Bots in the YouTube Comments
- Facebook Sponsored Ads
- Random targeted e-mails regarding a new crypto coin
It is also best to stay away from Discord Groups or Telegram groups that create pump and dump schemes, for example you might get a random invite to join someone’s channel or group and they want you to participate in a large pump and dump scheme with others. The only problem is that the organizers have likely already bought coins at a low price and waiting for everyone else to purchase it causing the prices to skyrocket. Overall, it’s just better to not join these groups and it’s more likely you will just end up losing money.