What is ‘pump and dump’ ? How is it used ?

Finance

The crypto market has always had a bad reputation regarding fraud, hacks, money laundering and other illegal activities.

So let’s discuss one of the most popular fraud tactics in crypto: pump and dump schemes.

What are pump and dump schemes?

Pump and dump is a security fraud that seeks to increase the value of a stock by making false suggestions. The offenders, already having a share of the stock, promote the company and as the price goes up sell their shares.

In the cryptocurrency market, the same schemes take place regarding small market cap coins. The practice is very common in the crypto sphere despite it being illegal. This is because crypto coins are highly unregulated which allows fraudsters to get away with crimes like these easier. Market manipulation becomes easier in small and uncontrolled markets such as the crypto-asset one.

How does it work?

A group of crypto investors buy large amounts of a certain crypto coin with a small market cap (like Bluecoin or Fantom) and convince inexperienced and naive investors that the coins will soon rise in value making them rich instantaneously.

Choosing coins with extremely small market caps is crucial as the low trading volume can easily inflate the price. As the price of the digital asset drives up the group of scammers sells these coins dropping the price exceptionally low.

Examples of pump and dump?

In Traditional Markets

In the early 2000s, Spear and Jackson Inc., Park financial group and International Media Solutions engaged in a pump and dump scheme. As a result, the net worth of Spear and Jackson grew to three million dollars.

In 2005, International Media solutions and Spear and Jackson Inc. were fined eight million dollars. In April 2007, the United States Securities and Exchange Commission brought charges against Park Financial Group and the firm was required to pay $113,000.

In The Crypto Market

Most pump and dump schemes in crypto are undocumented and the fraudsters are still running free. In a period of 6 months, in 2018, there were 4,818 pump and dump fraud attempts.

What can be done about it?

Many countries around the globe are currently adopting cryptocurrency laws and regulations in order to minimize fraud, money laundering, terrorist funding, so on and so forth. Governments and banks are committed to making the crypto sphere safer.

However, many crypto enthusiasts aren’t accepting of this thought thinking that governments are once again trying to control this new digital currency. It has the power of decentralizing the financial markets.

Investing in crypto isn’t that easy and there are many frauds and issues of that sort on the way. However, if you do want to be a good investor, crypto portfolio trackers can be of great use for you. Don’t know how to use them efficiently? Check out this guide on crypto portfolio management.

Leave a Reply

Your email address will not be published. Required fields are marked *