What is a pump and dump scheme?

• Pump and dump schemes are set up so that everyone who participates in them loses money, except the insiders

• Pump and dump schemes occur as far back as the 18th century, including influencers

• Many schemes have come along, whether in movies, books or real life

• Roughly speaking, there are two types of pump and dump scenarios: the inside job and the professional pump and dump by whales

• Pump and dump schemes are easy to spot if you know what to look for

• If you don't want to become a victim of pump and dump there are a few rules you can follow

What is a pump and dump scheme?

Pump and dump (P&D) is sometimes described as defrauding stocks or cryptocurrency by artificially pumping up the price with the ultimate goal of selling the cheaper purchased stocks or crypto at a higher price.

Usually these things are accompanied by advertising in a variety of forms to hold out a bone to investors that they will hopefully bite into.

The stocks or cryptocurrency being pumped are usually low-valued assets that have high volume and low market cap.

Once the fraudsters sell their overvalued assets, the value plummets and disillusioned investors are left with stocks or crypto that are suddenly worth much less.

History of the pump and dump scheme

This trade and commerce began in the 18th century. The South-Sea Company was founded in Great Britain in 1711. It was a public-private company whose purpose was to consolidate or reduce the national debt. Its operations consisted of the slave trade to South America.

In an exquisite and fraudulent collaboration between high-ranking politicians and this company, a scheme was set up to put more and more corporate funds into the shares of the company itself, artificially driving up the price. Members of Parliament were given shares in the company, where they were allowed to pocket the difference in price without paying for the shares. The trade in slaves was grossly exaggerated and hardly any money was actually made from it.

Influencers in the 18th century

Investors had no means to monitor all this and swallowed the messages like hotcakes, as the price kept rising. So-called "Night Wind Hawkers" (kind of bards or singers) were even hired to promote these stocks. This is all familiar if you trade in crypto, these were the first influencers spreading false information.

The price of these shares rose from around 125£ to 1000 in 1719. In 1721 it ticked below 100£. The bubble had burst.

Around this time there were all kinds of such companies in several countries artificially inflating their shares, and a dump of shares followed when the price of SSC was around 1000£. A series of bankruptcies of banks, goldsmiths and individuals followed in its wake.

Robert Walpole restored confidence in the financial system, but the pump and dump scheme was born.

Books and movies about pump and dump schemes

Charles Dickens wrote about stock market speculation in a number of books, including Nicholas Nickleby, Martin Chuzzlewit, David Copperfield and Little Dorrit. These were mostly seedy characters.

This state of affairs is also more common in well-known movies. "The Wolf of Wall Street" is about Jordan Belfort, who misleadingly praises penny stocks he purchased to the sky, then sells them for a big profit through the Stratton Oakmont company. The image that sticks in your mind is that moment when the "company" Aerotyne IND. comes into the picture that he sells as a good investment, when it is just a garage in the yard of a house.

We all know the phrase "Greed is good" from the movie "Wall Street." This movie features the shrewd trader Gordon Gecko who also has this kind of move in his repertoire.

Known cases

Jonathan Ledbed, a 15-year-old boy, bought penny stocks and sold them by promoting them on Internet message boards, leaving investors who bought high with worthless shares. The SEC did still sue him, but he retained most of his profits despite this lawsuit. He is one of the few who kept some.

Also notorious is the Enron case. By declaring false earnings figures, the price of their shares kept rising. Key Enron employees sold more than a billion dollars worth of overvalued shares before the company went bankrupt.

Save the kids

With a name like that, you expect some kind of charity. That was in there, a small portion of the trading fees went to charity on Binance. They had an anti whale mechanism built in according to themselves, but that turned out not to be the case. After research by YouTuber Coffeezilla, it turned out that influencers who had promoted the coin heavily were the same people who dumped the coin en masse when it started to become worth a lot.

SushiSwap

SushiSwap came like a comet and was listed on Binance after only a few days. The anonymous creator of this fork of UniSwap, Chef Nomi, decided to dump all his coins after 11 days, when more than a billion dollars had already been locked. After the community exploded in anger on Twitter, Chef felt compelled to deposit all the coins back into the project. All's well that ends well.

Ethereum Max

Kim Kardashian and Floyd Mayweather were paid to promote this coin. Given their popularity, they had a lot of influence. When the coin had a market cap of $250 million the organizers dumped all their coins and the value dropped to minute proportions. Kardashian had to pay more than a million dollars and was not allowed to promote crypto for a year.

CryptoZoo

NFT scam. It was a play to earn game, where you had to buy eggs that would spit out exotic NFTs after a certain amount of time, which you could then sell. However, out of these eggs came basic images of penguins and the like, which were completely worthless. Logan Paul, a popular YouTuber, and the other insiders were secretly lining their pockets with the egg sale deposits. Watch the documentary by Coffeezilla once to see how Logan let the audience in.

DeFi100

Created by a bunch of morally low-life figures for fraudulent purposes. They sold the project as a DeFi opportunity on the Binance Smart Chain, everything looked valid. After dumping their coins, they left a message on their website:

"We scammed you guys and you cant do shit about it"

Under that another kick after:

"HA HA HA. All you moon bois have been scammed and you cant do shit about it - DEVSIN"

These jokers walked away with around $32 million.

So it is clear: be careful when large groups of people participate in a very actively promoted "opportunity" in the crypto world.

Types of pump and dump schemes

There are roughly two types of pump and dump schemes in cryptocurrency:

1. The date with your "dealer." In this, the pump and dump organizers tell you to be there at a certain time, because then there is a great opportunity for you. They say where the coin will be bought and at what date and time, but not which coin it is. The latter only happens at the last minute.

2. Professional whales work together to create a coin with a low market cap and high volume per day gradually buy until they have enough to significantly affect the price. This is followed by a game of unsuspecting investors, who are attracted by the ever-increasing prices, until the whales strike and line their pockets with the money of the new investors in that coin.

How does a pump and dump scheme work in cryptocurrency?

There are many ways to set up something like this. Where it used to be common to work with email spam campaigns or by telemarketing to convince people that the organizers know something that the called person does not know, the pump and dump scheme goes much more professionally and quickly these days.

The Internet is home to places where many people congregate. With the rise of social media, it has become a lot easier to reach a lot of people in a short period of time. The more people there are in a group, the greater the chances of successfully promoting a stock or cryptocurrency. Of course, the topic of the group must fit the purpose. Some Telegram groups have more than 100,000 members.

As mentioned, there are two forms of this type of scam. First, let's talk about the form of pump and dump which is tempting to take part in once because it all sounds so logical.

Scenario 1

The organizers of a pump and dump scheme check CoinGecko's list to determine which coin they choose to conduct their practices with. Since they are professionals, they know exactly what such a coin must meet. In any case, it must have a low market cap. The reason for this is that it should not cost too much money to own a significant portion of all coins. Also, it must have a high volume per day, otherwise the purchases will stand out too much.

Suppose you want to pump and dump Bitcoin. If you want to influence the price of this you need a fair percentage of all coins in circulation. With a market cap of over 1,000 billion, you need "quite a lot" of money to do this. This is why there will almost never be a pump and dump of a top 100 coin, because you have to put in way too much money to successfully strike. It almost always involves coins from the rear, say coins lower than the top 500 or so.

The preparation

The organizers then start buying coins little by little, to hardly influence the price of the coin. From experience, they know approximately what percentage of the coin they can successfully sell at the moment suprême. Once these unscrupulous traders have filled their pockets, the time comes to strike.

Pump and dump groups

Often they have set up all kinds of social media channels in Telegram, Facebook groups and Discord channels to inform the unsuspecting public that they will soon be able to make a lot of money. All they have to do is get together at a specific time and date. Just before the appointed time, they inform the other investors which coin is actually involved.

It sounds very logical that this strategy works. If you all purchase a coin together, the price has to go up. It will. Especially when the market cap is so low. Of course, they don't tell you that they have been buying that coin for a long time.

The implementation

When the appointed time arrives, the insiders tell you which coin it is. Sometimes you can become a paid VIP member of such a group and be told what coin it is before the others know. At some point, one of the insiders shouts "Now!" The idea is that, at that moment, every member starts buying that coin and the price rises sharply. Since there are enough buyers, that's what happens. Usually it only takes seconds before the organizers dump all their coins at market price and the much higher price suddenly starts a sharp price drop so quickly that you don't realize what's happening until you're already at big losses. Once the smoke clears around your head you only understand such practices, namely how a pump and dump scheme of this kind works. At least, if you are smart enough to see through it.

Why you shouldn't join pump and dump

Now that we have told you, of course you are not going to participate in this kind of practice anymore.

Participating in a pump and dump scheme is never a good idea, but if they won't even tell you in advance which coin it's about, it makes sense that they don't want you to buy this coin before the collection moment. Only they should be able to profit from the unrealistic price increases and you should be their victim.

Scenario 2

This goes on so covertly that you don't even realize you have become a victim of a P&D scheme.

Technical phases of the pump and dump scheme by professional whales working together:

1. Building a position. In this phase, whales buy a coin that is within their budget. Think of a coin with a market cap of €150 million or lower. Together, the whales have assets of, say, around €100 million. There must be sufficient volume traded per day in this coin, otherwise their moves start to get noticed. They always buy very small quantities, usually with a trading bot. The price hardly changes, but their share of this coin is growing visibly.

2. Getting the price lower. Putting large sell orders (sellwalls) in the market prevents the price from going up. The purpose of this is to get the price down and get all sellers who go below it out of the market. All supply below the sellwall is bought up by the whales.

3. Market testing. This involves a test pump, which they use to check what grip they have on the coin and the reaction of traders to the pump. They also try to find out where the weak hands (usually inexperienced traders working with no stop loss or other plan) are and how they might get them out via a panic sell. In a test pump, the whales can see where a resistance is in the price so they can determine their maximum margins.

4. The shake out. In this, the whales drive the price down, so the price keeps falling. At some point, more and more people start selling their coins because they fear they will lose even more. Whales can hereby dump their coins in such a way that the price is driven below their purchase price.

5. The real pump. When the group of whales has squeezed enough weak hands out of the market and the market share is sufficient, the moment of the big pump comes. They start buying in en masse to artificially inflate the price of the coins they already have. They go all out to get the price up as quickly as possible with bots. In this way, they encourage others to buy this coin that is suddenly rising a lot and fall into their trap.

6. The dump. At the test dump, they found out what the resistance was. Around this price, the coins are sold via a clever gradual selling system, which they have already tested many times. As soon as they see large volumes being bought, it is time for the complete dump at market price, causing the price to collapse completely within minutes.

7. Dividing the dough. All participating whales sit down to compare their profits. Everyone gets an equal share.

The last scenario is so sneaky that you have no idea you are in the middle of it. It does serve as a warning against buying mid to low cap coins that rise and fall for no reason.

For example, it may well be that a particular storyline is so popular that coins related to it rise from the rear, as was the case some time ago DeFi and now AI and meme coins. If you cannot find a reason anywhere then a pump and dump is obvious.

Pump and dump and similar schemes

Pump and dump is quite similar to a number of other schemes:

1. Ponzi schemes. This is a form of scam where return on investment is presented very high. One of the big differences from P&D is that the time frame is a lot longer in most cases. It can take years for a ponzi scheme to fall apart. In a ponzi scheme, the organizers and initial investors have the best papers. The longer this scam goes on, the harder it becomes to find new investors and the ROI can no longer be raised. This is when the bubble bursts. With a ponzi, you also usually get precise information about the ROI, whereas with P&D, a promise of profit is more likely to be implied. Some ponzi schemes begin legitimately, but later lead to illegal claims of profitability, while P&D is fraudulent from the start.

2. Rug pull. In the process, a smart contract fraud, by coding it so that the creators can generate profits and the buyers can only make losses. Basically adding into the coins code, that everyone can buy but only certain wallets can sell. Another form of back pull is selling huge amounts of coins at market price, pushing the price of the coin to 0. It can also involve stealing liquidity from a liquidity pair on a DEX, for example. The back pull is usually carried out within a week.

3. Short and distort. This is a kind of reverse pump. First you go short (with leverage betting that a coin will go down in price) on a particular coin and then you go and tell the world, together with a group of influencers and others, what a bad coin this is. Once people start selling their coins en masse, you walk in with your short call.

How do you recognize a pump and dump?

• Trading takes place on an exchange where the pump and dump scheme is not as paid attention to, especially the smaller exchanges. Binance, for example, does pay attention to this and has even undone pump and dumps.

• Sudden rise on a round number. Nobody agrees to pump the coin at 15.48. They agree at 15.30 or 16.00, nice round numbers work best. If the price suddenly rises exactly from a full hour then that is suspicious.

• An analysis of the coin shows that little has been happening around it for a long time, no mainnet rollout, no news, nothing. What a coincidence that it is now suddenly rising sharply. You often see this with the highest risers per day in CoinGecko. Coin X, which is at position 968 in the list, suddenly goes up 124% after years of stagnation. That looks like a pump and dump to me. What else?

• Low total market value and hefty rise. It cannot be ruled out that suddenly a lot of people see this coin, but more likely a pump is taking place.

• Lots of advertising for an obscure coin by influencers or unsolicited emails alerting you to great opportunities, and the like.

• Get into well-known pump and dump groups and see what they propose, without obviously joining in. That way you can see firsthand how it works and recognize this strategy better when you're browsing the lower end of CoinGecko again.

So if you see the value of a fairly low-priced cryptocurrency suddenly rise sharply on an exchange, chances are that this is a pump and dump. It is tempting to buy this coin, but you usually lose a lot of money when the dump follows and you are left with significantly lower priced coins.

P&D is especially common in bull markets because that is when inexperienced traders enter the market.

Regulation crypto

Regulation in cryptocurrency regarding this type of scam is still in its infancy. Even in equities, it is still very difficult for the SEC, for example, to charge people with pump-and-dump schemes in penny-stock fraud. Even in Europe it is difficult to get everyone on the same page, although the Financial Markets Authority is trying to align itself as much as possible with European guidelines.

Occasionally the authorities can crack down on a fraudster who is blatantly engaged in P&D schemes, but it is still difficult to do anything about it.

The Case Xpose Protocol is an example from which criminal cases followed, with well-known individuals touting this coin, then dumping it.

How do you avoid becoming a victim of a pump and dump scheme?

1. Do not join pump groups. Optionally, you can join to get a full understanding of the trick, so you can use that experience later when recognizing it.

2. Don't be tempted to buy a coin with a lower market cap that is rising significantly for no apparent reason. Do your own research, be critical and see if there is a good reason for the rise. Or only buy coins that are already quite high, making a P&D too expensive to perform.

3. Don't trust anyone. It is tempting to watch all kinds of influencers on YouTube and other social media platforms. These lazy people usually try to get you to buy a coin that they have a lot of, or that they are paid for by the coin's own team. There are many claims about all sorts of things, but no one knows exactly what any coin is going to do. So don't believe anyone if you know this.

4. Trust yourself. Getting serious about it will give you experience that you can't get any other way. Nothing is free in the world of cryptocurrency. What you learned today you can apply all the following years in the hard cryptocurrency battlefield. Nothing gives as much satisfaction as getting good results through hard work and a range of working strategies for every occurring event in the world of crypto. There is no such thing as a free lunch.

"Someone is sitting in the shade today because someone planted a tree long ago."