A fraudulent trading scheme that involves artificially inflating the price of a low-value coin through coordinated group buying. The coin (or token) price increased dramatically, known as the "pump". The members of the scheme then sell their coins at the peak, known as "dumping", resulting in the price to crash and causing significant losses for individuals who purchase the coins during the pump.
How a "Pump and Dump" is Orchestrated
A 'pump-and-dump' scheme typically function as follows:
- A group of individuals often called "pumpers," coordinate to buy a large amount of a low-value cryptocurrency, creating artificial demand and raising the price.
- The pumpers then use various means (primarily social media, and messaging apps) to spread the word about the coin and entice others to buy it, further inflating the price.
- When the price reaches a desired level, the pumpers sell their holdings, causing the price to crash and leaving late investors with significant losses.
- The pumpers pocket the profit made from the sale of their holdings.
It is important to note that pump-and-dump schemes are illegal in most countries and can result in criminal charges. However, given the anonymous nature of cryptocurrencies, this is often not the case as it's difficult to identify the individual participating in the scheme.
How to Avoid falling Victim to a Pump-and-Dump Scheme
Here are a few tips to avoid falling victim to a pump and dump in crypto:
- Do your own research: Before investing in any cryptocurrency, thoroughly research the coin, its technology, and the team behind it.
- Avoid following hype: Be wary of coins that are suddenly getting a lot of attention without a clear reason.
- Don't rely on social media: Don't rely on social media alone for information about a coin, as pumpers often use it to spread false information and manipulate the market.
- Diversify your portfolio: Don't put all your eggs in one basket by investing heavily in a single coin. Spread your investments across a diverse range of cryptocurrencies to minimize your risk.
- Use caution when trading low-value coins: Pump-and-dump schemes often target low-value coins, so be extra careful when trading these.
- Monitor the market regularly: Keep an eye on the market and be aware of any unusual price movements, as these can be a red flag for a potential pump and dump.