Pump and Dump Crypto Scheme: How to Avoid Scams? | LiteFinance (2024)

The Pump & Dump strategy appeared long before cryptocurrencies. Presumably, it came from the stock market. It can be explained by the fact that the organizer of the pump and dump schemes chooses a low-liquid asset with a consistently low cost and artificially accelerates the price, skimming the cream at the peak. Someone considers it a scam, while others, on the contrary, take part and enjoy the excitement. In this article, we will explain how a pump is created, how to recognize a pump using examples, and how traders can make money on it.

Major takeaways

• This article discusses the concept of a Pump & Dump strategy in the context of cryptocurrencies. This strategy artificially increases the value of an asset (typically a low-value cryptocurrency) to sell it at the highest possible price. This can be executed either through large capital investment or by agreement amongst a group of organizers.
• It is possible to profit from these strategies if one can access insider information, perform transactions quickly, or act as an organizer. However, the risks are substantial, and caution is advised when spotting such strategies, which might involve abnormal price spikes, manipulation by bots, or misleading information from unreliable sources.
• The article further provides tips on how to avoid falling victim to these strategies, such as scrutinizing coin listings, analyzing startups and price charts, and avoiding penny stocks. The usage of trading bots is also mentioned, given their capability to perform rapid transactions. While potentially profitable, the Pump & Dump strategy is considered unethical due to its manipulative nature, although it's not explicitly illegal in the largely unregulated cryptocurrency market.
• The article concludes by clarifying that cryptocurrencies like Bitcoin and XRP are not typically subjected to Pump & Dump strategies due to their market behavior and the size of capital required for manipulation.

What is Pump and Dump?

Cryptocurrencies are a relatively new type of digital assets, but the number of strategies invented for them is already impressive. The trading approaches can be divided into three groups:

• The ones based on technical analysis: trading on patterns, support and resistance levels, Fibonacci.

• The ones based on fundamental analysis: trading at the start and end of forks, based on news from developers.

• The ones based on psychology: trading by understanding the principles of market participants’ actions (“hamsters”, “whales”).

The Pump & Dump scheme could be classified as the third type of strategy, but it is better to call it a separate category. Many consider it a scam - on the Internet you can find the definition of “pump and dump fraud”. Yes, it is, but who said you can’t take part in it?

Pump & Dump is a strategy built on the artificial sharp growth of the cryptocurrency due to the coordinated actions of the participants, followed by a price collapse.

Pump & Dump schemes can be compared to hype - these are also pyramids in a sense, but this does not reduce the number of people who want to participate in them. It's all about excitement, from which traders get no less pleasure than from a successful deal. Indeed, money is not always the goal - trading can be exciting and sometimes the experienced emotions are much more valuable than money.

How do Crypto Pump and Dump Schemes Work?

The organizer (pool of organizers) makes every effort to popularize the token. Within a few days, prices grow by 100% or more. Then the organizer collects the profit after selling his coins.

Theoretically, this scheme is organized as follows:

• The organizer of the pump (person or group) selects an asset. It should be a relatively unknown cryptocurrency with a stable sideways trend, which means crypto investors are not interested in it. The coin should cost a few cents and be far from the top, but have an interesting legend behind. Most often, little-known tokens are chosen for the dump scam.

• A coin is bought in small volumes - so that there is no premature growth. At the same time period, a news background is being formed in the media and on forums. The organizers are also engaged in active advertising - they praise the cryptocurrency, predict future success for it and attract more participants to purchase.

• At the start of the pump, organizers join in the form of insider trading and invest in the asset so that the price moves up. Warmed up by the informational background, traders buy a coin, the price accelerates even more - the demand for crypto investing increases.

• At the peak of the first pump wave, the organizers partially satisfy the demand of the “hamsters” and sell a large number of the crypto asset. The price moves down.

• The organizer allows the price to drop to a psychologically agreeable level and buys the coin again, provoking a second wave of growth. Traders see growth and think that there was a correction providing false promises.

• The second wave is usually higher than the first and at its peak the organizers completely exit the market. However, the number of waves depends on the organizers themselves.

This is an example of a hidden Pump & Dump scam when only the organizers know about the growth. The rest of the participants are simply being used, so be careful if you see unreasonable praise of some little-known coin so as not to become a participant in this kind of manipulation.

The crypto community on the Net is full of advertisem*nts for chats and groups offering to people an attractive target to unite, create a pump, and earn more money. The organizers of such Telegram channels use the power of tens of thousands of participants and often earn not only on the Pump & Dump strategy, but also on paid access to their private exclusive chats.

Pump and Dumb schemes are considered in the Wall Street stock market (this is where this strategy appeared) as fraud, but this is arguable. Each broker warns the trader about the potential risks of losing the deposit, and every trader accepts them. Such traders are driven by the desire for easy money, but they don’t perform a detailed market analysis and lack knowledge. They lose money solely because of greed, so who is to blame? In addition, most of the pump participants know what they are involved in.

Examples of Pump and Dump

Theoretically, pumps should have an organizer who coordinates the pump and dump group and provides the necessary information. But there are examples of spontaneous pumps, the “unwitting” organizers of which are media people. Such pumps can be called "involuntary" because it is impossible to prove their intent. Besides, everyone understands that famous people simply do not need pumps - there’s no point for them to earn money in such a way. But one fact is undeniable: a few words are enough to pump an unpopular crypto asset. A few examples of consistent and “media” pumps in the cryptocurrency space are discussed below.

1. E-coins

An interesting example of a pump and dump is the E-coin incident. On February 6, 2018, the little-known cryptocurrency rose in price by 4,742%. It took the cryptocurrency startup just one day to break into the TOP-100 from the last places in the TOP-500 in terms of capitalization, and even enter the TOP-20.

Interesting to note, at that time the cryptocurrency market was in stagnation. Bitcoin even tested a support zone, falling below $6,000. So why would people invest heavily in such an unattractive project?

There was almost no information about this coin, not to mention the interest from crypto investors. The latter is confirmed by an almost perfectly flat schedule for 2017 - even during the period of a powerful surge in the cryptocurrency market since the spring 2017, no one cared about E-Coin.

2. Quark

This is a good example of a two-wave pump.

The project itself is of little interest to anyone. It was supposed to be another analogue of Bitcoin, but investors quickly forgot it, as evidenced by the price chart. Growth in January 2018 is not a pump.

3. U.Cash

This is not quite a pump, but this example is worth mentioning - the nature of the chart and the psychology of traders are identical here.

This unknown cryptocurrency appeared less than a month ago, and, as it often happens with startups, at first it actively grew (scalpers’ attempt to capitalize on the hype around a new project). Then the price collapsed, and the second wave of the pump followed. Usually, after the first recession, the project is no longer interesting to anyone. Here we can say for sure: someone (most likely developers) implemented the Pump & Dump tactics. After the second wave, the value of the coin went down, achieving a lower price —that was quite predictable.

4. The power of Elon Musk's words

Elon Musk has repeatedly proven his influence on the cryptocurrency market. But if the local price shifts of the BTC or DOGE are more of a fundamental reaction to Musk’s announcement regarding these coins, the following examples cannot be explained otherwise than by a “pump”.

• Santa Floki (HOHOHO). At the end of December 2021, Elon Musk twitted a selfie with his puppy named Floki, whom he dressed up in a New Year's costume. It is difficult to say how users were able to associate HOHOHO with this fact, but the cryptocurrency worth 0.00000065 USD grew by more than 5,000% in a few hours. And it collapsed just as quickly. A few months later, the project was completely removed from the listing, but someone managed to make good money on it. This was one of the great examples of the crypto “pump and dumps” incidents.

It is worth noting that Elon Musk's puppy acted as ‘a pump driver’ several times. In September 2021, his mere appearance in the family of a billionaire led to a spontaneous cryptocurrency pump of 1,300% of the Shiba Floki (FLOKI) coin. The name of the puppy was invented back in July, so it is unlikely that such a rapid increase in the coin’s price of a coin with a rating below 2000 could be associated with Musk's desire to make money.

• VikingsChain, Viking Swap and Space Vikings are also notorious examples of cryptocurrency pump and dumps. In early November 2021, these coins went up by about 350%, 3,700% and 600% respectively after Musk posted several tweets about the Moon and the Vikings. Elon suggested that the Vikings were the first to land on the moon. Did he relate to these coins? There’s no evidence of that. However, the coins, which are in no way connected with either the Moon or the Mask, have risen sharply at a much higher price than ever expected.

Do not confuse the crypto Pump & Dumps incidents with natural volatility. Let’s observe the example of the TRON cryptocurrency for you to see the difference.

At first glance, we see a pronounced pump here, but it is not. Please note: the coin is in the TOP-20 in terms of capitalization. To pump such a token, that is, to influence the cryptocurrency rate, you need a lot of money, and institutional investors (“whales” - cryptocurrency exchanges, mining pools) work according to completely different schemes.

And the second point: the growth of the coin coincided with the uptrend on the entire cryptocurrency market, the capitalization of which in early January exceeded $850 billion.

Below, there’s one more example of how price spikes after the statements of famous people, but it’s a rather natural growth than a pump.

At the end of October 2021, Mark Zuckerberg announced the rebranding of Facebook Corporation to Meta with a corresponding change in the company's development strategy. The Metaverse segment was chosen as the main goal: they started building a metaverse based on virtual and augmented reality technologies.

Similar startups of a smaller scale already exist, especially in the cryptocurrency world. Crypto mataverse users buy and sell virtual land linked to NFT tokens and even issue mortgages for such lots. It is logical that some metaverse-related free coins immediately gained value and grew in price: Decentraland (MANA), Sandbox (SAND), Metaverse Miner (META), Metaverse (ESP), and MetaverseX.

Compare the two charts. MANA:

Decentraland is one of the leaders in the metaverse segment. After a sharp increase in the startup’s popularity, a correction came. But even after a few months, the price has not returned to its previous level. Therefore, we are not talking about pumps here.

Metaverse Miner (META):

We see a clear pump here: a sharp rise followed by a rapid fall below the original position. Metaverse Miner is an unknown "junk" coin, the growth of its value is a consequence of the general hype on the wave of the metaverses, which passed relatively quickly.

Both of these charts show that the same fundamental factor can cause both price growth of a promising cryptocurrency and a pump. In the first case, a long-term investor can earn, and in the second - he will lose his money with 100% probability (unless he manages to withdraw money before the cryptocurrency dump).

Pump & Dump features

It is relatively simple to identify Pump & Dump schemes: price jumps have no fundamental reasons and are not in sync with the general cryptocurrency market trend. Long-term investors are not interested in projects with capitalization of some tens thousand USD; so these start-ups are the most interesting for pumpers.

Features of Pump:

• sharp price surge and multiple ask orders without any significant fundamental reason;
• the quotes grow on a single platform, without any rise on other exchanges;
• ads and tips to buy the cryptocurrency on the Internet chats, forums and social communities.

It is crucial to see the difference between a pump and a price spike as a result of fundamental factors:

• Pumps are targeting “junk” free coins worth less than a cent — they are out of the CoinMarketCap’s Top-1000 rating. It is difficult to pump coins worth even a few dollars — much more money should be used to affect the price significantly.

• Any fundamental rise in price is based on some logic. Investors buy an asset not for the purpose of a quick profit - they see the ground for further development and potential benefits for users.

• During a pump, the price can spike by 300-500% or more in a few hours. Growth by 1000-3000% in pump & dump schemes is a common occasion. Fundamental price growth rarely exceeds even 100-200%.

• After a natural spike, the coin price always reverses. But when it comes to pumps, it returns to the previous levels. During fundamental growth, the token price falls only partially, and investors manage to get some profit.

• Pump and dump scheme last for a few hours or days. Correction after fundamental growth can last several weeks.

Organized Pump & Dump has picked up popularity recently. It is based on that everybody, wishing to take part in the project, joins the community, where organizers share the information about the upcoming Pump, concealing until the last, what coin will be pumped. Large exchanging platforms don’t resort to these activities. First, they don’t enlist small cryptocurrencies (and it is difficult to pump large ones). Second, they try to restrict similar strategies. However, there are some exceptions. For example, Bittrex and Yobit are one of the largest pump platforms.

Telegram is used as a messenger for Pump & Dump, because of its end-to-end encryption, it enables creating private chats and channels, providing its members’ confidentiality. The largest communities include Pump Notifier (about 27,000 of people), PumpKing Community (about 14,000 people), Crypto4Pumps (about 16,700 people), AltTheWay (abou 8,960 members). The number of group participants can change.

In practice, the cryptocurrency Pump looks like this:

• the scheme organizers inform about the certain exchange and the cryptocurrency at the scheduled time period. Promoters (scheme participants) immediately start buying the coin out. That is how the first Pump wave emerges. It is preceded by a simple news bit, like an update by the Web site developers.

• the participants of the first wave lure outsider investors-”hamsters”, who push the price higher, and then, they make up the second wave;

• As soon as outsiders enter the market, the group organizers inform through the channel that the coin should be sold.

Telegram channels share the information through each other, as the more people are informed of the next pump, the more successfully it is carried out. Pump groups can be open and private, paid and free. As the organizers buy out the cryptocurrency in advance and inflate its rate, everything depends on the seconds. Paid groups get the information 30 seconds earlier. And by the time the market is entered by free telegram group members (they may not even suspect that there are paid ones), paid group members will have dumped the digital assets, and the free ones can only hope for another wave.

Pump & Dump scheme is immense. To launch a wave, it is necessary to open hundreds of orders very fast; and so, the strategy has transformed into automated trading. Most work for traders is done by bots, like Moon Bot, HaasOnline and others. There is also special software, auto clickers, which create an image of large trading volume through multiple orders, worth minimum money, being opened very fast. An auto clicker average speed is one click per 1-5 seconds. To start pumping a coin worth $0.001-0.003, one needs 2.5-3 BTC, so even common traders can pump such cryptocurrencies. An example of such coin is Sport that is at the bottom of TOP-1500 list.

Cryptocurrency exchanges don’t like these strategies and pretend to be fighting that. For example, Bittrex restricted the rules for calculating the percent change in cryptocurrency quotes and doubled the minimum trade size. But, in fact, Pump & Dump yields them commission and increases their popularity. And it is not guaranteed that the exchanges themselves don’t take part in the schemes and gain higher profit from the commodity futures trading commission. At least, a daily number of pumps doesn’t reduce; there is even a new modification, ICO pump.

Are Pump and Dump Schemes Illegal?

The question of whether the pump and dump schemes comply with the law is very ambiguous for several reasons:

• How to prove intentional cahoot of investors? After all, a fundamental price surge due to investors’ panic is not a violation of the law. Whereas the manipulation itself is.

• How to identify participants of the cahoot? It is easy to do on a well-established exchange market,but almost impossible on the anonymous cryptocurrency market.

• How and whom to hold accountable? Participants of cryptocurrency pumps are citizens of different countries of the world, it is impossible to hold them accountable. Theoretically, the pump organizers can and should be held accountable. But they should be identified somehow.

Regulators consider “Pump & Dump” schemes to be illegal, since the price should be formed exclusively by market methods, and any artificial manipulative actions are a deception of investors. But at the same time, regulators admit that they have no clear legislative grounds for suppressing such pump and dump schemes in cryptocurrencies. The legal status of cryptocurrencies in some countries has not yet been fully determined. Besides, regulators do not have effective tools that could influence pump participants and stop their occurrence.

However, regulators are not giving up. In October-December 2021, the Australian ASIC managed to infiltrate one of the largest closed pump channels. But all they could do was to close the channel and warn its participants about possible fines and legal proceedings.

So, what is the conclusion? The “Crypto pump and dump” strategy for cryptocurrencies is more unethical than illegal. If an investor voluntarily invests money in a sharp rise in the value of digital assets and does not have time to withdraw funds before the collapse, he will not be able to prove the fact of fraud.

How to Avoid Crypto Pump and Dumps?

A strong rise in price is the dream of many cryptocurrency investors, they believe that new all-time highs will follow the ups in 2017 and 2021. But investing on a sharp rise puts you under the risk of getting into a “pump and dump”, which always ends in a scam.

How not to fall victim to the crypto "pump and dump" scheme and what to keep in mind when analyzing the market:

• Check the listing of the coin on the top cryptocurrency exchanges and the CoinMarketCap websites. On such platforms, startups undergo a scrupulous check and obvious potential scams are not included in the listing.

• Analyze the startup. Ask one simple question: “Is there a real reason for the price increase?”. If a startup is one of the leaders in the segment, price growth on the news is logical. If a startup has only a consonant name and nothing to do with the news, then an increase in its price is a pump. Examples of pump and dump are given above.

• Analyze the price chart and the asset’s development roadmap. If the price follows the general market movement, it is not a pump. An abnormal rise in prices, which is not supported by any informational reason, is a reason to be wary.

• Try to avoid coins worth a fraction of a cent. Some exchanges try to lure traders by offering zero exchange commission. Their price is easier to manipulate.

• Do not invest in penny stocks of startups that appeared a few months ago. As a rule, serious projects develop for more than one year.

Another problem of the crypto investing sphere is “fake” startups. If the pump is carried out by organizers who are not related to the project, they are likely to promote a fake cryptocurrency. In this case, fraudsters create a landing page - a site without a technological model. They sell tokens in small portions so as not to arouse suspicion. When the price of a cryptocurrency increases, scammers sell their main package of tokens and disappear. Such crypto “pump and dumbs” have already occurred in cryptocurrency ICO startups and are considered to have finished, but fraudulent schemes still do occur.

The faster the price of an altcoin rises, the higher the risk. If you don’t want to take risks, invest in startups from the TOP-200 of CoinMarketCap and industry leaders (DeFi, DEX, GameFi, etc.). You can also find worthy projects on well-established launchpads, for example, coinlist.io, and avoid the risk of cryptocurrency pump and dumps.

Can People Make Money from Cryptocurrency Pumps and Dumps?

Yes, pump and dump can be implemented in the crypto market and you can earn if you meet the following conditions:

• You have access to private channels that contain first-hand information. Most often, they are paid because pump organizers want to earn money. This way you can avoid faling on false information.

• Your platform/broker/exchange has excellent transfer speeds. Ideally, you should use a trading robot. Your task is to buy cryptocurrency as quickly as possible at the lowest price at the moment you get information on which particular altcoin is the target of the pump and when it starts. The same robot will allow you to sell an asset at the peak of demand from the "hamsters". In the pump scheme, those who enter the cryptocurrency market too late (at the very peak) lose.

• You are the organizer of the pump.

If the pump has already started, do not try to make money on it. Most likely, you will not have time to earn any more because the asset is sold automatically and almost immediately after the price surge. If you are purposefully going to take part in the pump, remember: the biggest problem for investors is greed. The desire to sell an asset at the highest price turns into a loss of investment when the asset depreciates.

Therefore, if you decide to participate in such pump and dump schemes, stick to the following strategy:

Enter quickly at the lowest possible price and sell 50% of the digital assets when the price increases by “100% + margin”. Thus, you return the initial investment and, after going to breakeven, dispose of the remaining 50% of the asset at your discretion.

Pump and Dump Bots

In an organized pump, the speed of transactions is crucial. Robots that can open and close many positions in a few seconds, that’s why they are commonly used in pump and dump scams. The margin pays off due to the avalanche-like price movement. The major advantage of algorithmic trading is the speed of decision making. However, robots can make mistakes, which is why the level of risk in cryptocurrency bot trading is still high.

Pump and Dump Cryptocurrencies Yourself

To participate in the cryptocurrency pump, the minimum amount provisioned by the trading conditions (if any) is enough. The "pumping" of capital occurs due to a huge number of transactions and their volumes. And each trader can make his contribution to the crypto pump. Even though big capital plays the main role in the pump, private traders can also take part in it. The main secret here is buying at the beginning of the pump and quickly selling before the price peak. That’s why the speed of transaction processing is so important in a pump and dump strategy.

How to save your funds during Pump & Dump

• don’t invest in already growing trend. The pump yields profits to those, who create it, and to those, who managed to enter it at its first seconds. There is a chance to gain during the second wave, if there is one;
• don’t base your decisions during Pump and Dump on the forums, the exchange chat;
• accept in advance that you can lose your money and see Pump & Dump as a gamble (though it won’t protect your money, but it will save the most important- your nerves and peace of mind).

Conclusion

Pump & Dump should be considered as a separate strategy, it does not require knowledge of technical and fundamental analysis. It’s not clear whether this strategy can be called fraud, but the organizers definitely win here. Why not become one?

Given the anonymity and lack of legislation, this is not prohibited. The pump object has a stable price, so if the scheme fails, the losses will be only on the margin’s level (the coin is unlikely to fall below the initial price point). All you need to do is find people who are ready to buy. Good luck!

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.