A Pump and Dump (P&D) scheme in the context of cryptocurrency refers to a coordinated and manipulative strategy employed by individuals or groups to artificially inflate the price (pump) of a particular cryptocurrency and then quickly sell off their holdings at the inflated prices (dump). This scheme takes advantage of the relatively low liquidity and volatile nature of many cryptocurrency markets.
How a Typical Pump and Dump Scheme Unfolds
Selection of a Target Coin: Perpetrators identify a relatively low-market-cap and low-liquidity cryptocurrency as their target. These coins are easier to manipulate since a smaller amount of capital can have a more significant impact on their prices.
Promotion: The schemers promote the chosen cryptocurrency through various channels, such as social media, online forums, and chat groups. They spread positive news, create hype, and encourage others to buy the coin, often claiming that its value will skyrocket soon.
Artificial Price Increase (Pump): As more people start buying the targeted cryptocurrency due to the hype, its demand increases, causing its price to surge rapidly. This surge is the “pump” phase, and it creates a false sense of momentum and potential profits among unsuspecting investors.
Dump: Once the price has reached a sufficiently inflated level, the perpetrators swiftly sell off their holdings, capitalizing on the artificial demand they created. This mass selling causes the price to collapse dramatically.
Losses for Unsuspecting Investors: Investors who bought the cryptocurrency during the pump phase end up holding overvalued assets, and as the price crashes during the dump, they incur significant losses.
Pump and Dump schemes are illegal and considered market manipulation in most jurisdictions. They exploit the lack of regulatory oversight and the decentralized nature of many cryptocurrency markets. Investors are urged to exercise caution, conduct thorough research, and be skeptical of sudden, hype-driven price surges. Regulatory bodies are increasingly cracking down on such activities to protect investors and maintain the integrity of the cryptocurrency markets.