Since time immemorial, fraudulent shareholders in companies often use manipulative means to boost the market value of their companies by publishing false information about the stock prices.
This has been an economic context and problem since the 1700s. An example is the false statements made by the con artist shareholders of the South Sea Company in the early eighteenth century. They conned people about the business and its revenues to boost their stock price artificially before selling to unsuspecting consumers who would invest in them, thinking they are investing in a big and favourable asset.
However, in this modern era, the pump-and-dump strategy is still prevalent among many con artists.
This problem has even become more severe and critical than before since the birth of blockchain technology and cryptocurrency trading. The reason for this could be linked to the decentralized nature of the blockchain which nullifies government intervention and regulation, thereby exposing cryptocurrencies to some market manipulation like the pump-and-dump trick.
In this article, we will discuss what crypto pump-and-dump schemes are, how they work and how to identify them.
What Are Crypto Pump-And-Dump Groups?
A crypto pump-and-dump group is a group of people who engage in the fraud of artificially inflating the price of the crypto they have acquired over time by publishing some incorrect information about the coin in order to draw traction to it (pumping), then sell the cryptocurrency to the uninformed buyers at exorbitant prices (dumping).
The inflated price of the crypto usually declines after it is sold to the consumers which leaves them at a huge loss and the fraudsters will make a great profit.
Pump-and-dump groups are self-organized individuals who carry out online crypto fraud using a pump-and-dump strategy. These pump-and-dump groups organize and operate in plain sight on the Discord server (voice over internet protocol and text chat service) or Telegram (instant messaging app), which makes it possible for anyone to join the group without restriction and permission.
The members and leaders operate in ranks such that higher ranked members initiate the pump by revealing the target coin earlier than the lower ranked users.
With the knowledge of the target coin to be targeted, the member takes the advantage of buying at a cheaper price before the coin is pumped artificially, hence profiting from the pump-and-dump scheme.
Most of the pump-and-dump groups are structured like a pyramid where the rank of a member depends on how many new members who joined through them. Members move up the hierarchy by adding new members.
On the contrary, some groups operate on a simple structure which accommodates only two levels: VIPs and common members.
Users are normally required to pay a charge in Bitcoin(BTC), between 0.01 and 0.1 before they can join these organizations.
How Crypto Pump-And-Dump Works
Pump-and-dump crypto con artists use a lot of strategies to artificially boost the price of cryptocoins for their gains. In order to understand fully the rudiments of crypto pump-and-dump scams, you need to read through the phases the pump-and-dump scammers undergo to con their members.
1. Communicating The Basic Information:
The first step they take in their operation is to communicate the exchange to be used to carry out the operation, the exact start time of the operation and if the scheme will be free for all or ranked. Those with a VIP rank and common members receive the message at the same time if it’s free for all, sometimes they receive the message a few days or hours ahead of the common members.
2. Announcement Of The Goal Coin:
The second stage is the stage where the goal coin is announced repeatedly as the date of the operation approaches.
The group members are informed of the goal coin as soon as the pump starts but the hierarchy determines when the information will be passed. The members of the higher hierarchy will be informed earlier than others.
The name of the cryptocurrency is revealed in a blur graphic such that only humans can understand it with ease. The motive behind this is to stop bots’ from parsing the message using optical character recognition (OCR) methods which initiate faster market operations than people.
Optical Character Recognition is a technique used to transform the text in an image into a machine-readable text format.
3. Spreading News To Draw Outside Investors:
This is the last stage where the fraudulent market information dissemination begins. The admins will tweet about the price of the coin and ask everyone in the group to help build hype around the cryptocurrency price, causing panic buying among folks or the psychological phenomenon of FOMO(Fear of Missing Out).
Users make good utilization of Twitter, special chat rooms and forums to disseminate their messages.
Is Crypto Pump-And-Dump Illegal?
One may have asked if the activities of crypto pump-and-dumps are legal since they only build hype around a coin to inflate the price on social media platforms like Telegram channels.
Well, executing a pump-and-dump operation in the stock market is illegal, hence a financial criminal offence.
Since cryptocurrencies are not legally considered securities, they might not violate any existing laws, even though the pump-and-dump activities are both legally and morally controversial.
However, regulated crypto exchanges treat crypto pump-and-dump crypto scams as illegal.
How To Identify A Crypto Pump-And-Dump Scheme?
As a crypto investor, it is very important to understand the reason why and how quickly someone can just carry out a pump-and-dump scam. Even though there seem to be no convincing indicators of this scam, investors should be wary of some unusual hype around a project and cryptocurrencies, they could be a strategy of pump-and-dump scammers.
Sometimes, the price of a cryptocurrency may just spike from the blues and many are pushed into panic buying due to fear of missing out. On the contrary, this could be the work of a crypto pump-and-dump scheme.
It doesn’t matter who promotes the cryptocurrency, whether a popular influencer or not, it is irrelevant especially if the coin was unrecognised and neglected in the past.
Consider the possible motivations behind the celebrity or influencer promoting the cryptocurrency because most influencers are novices in cryptocurrency. They are just paid to promote the projects and as such, crypto pump-and-dump scammers can reach out to them for help in exchange for money.
Therefore investors should continually analyze crypto projects and be wary of the many techniques used by these crypto pump-and-dump schemes before investing in any unknown crypto project.
Conclusion
Crypto pump-and-dump groups are real and working underneath the vast cryptocurrency ecosystem to create a hoax in the market and influence the prices of crypto to their own advantage.
Crypto investors should be alert and critically evaluate every crypto project they come across. Also, one should develop a strategy and maintain the same strategy both in trading and investing.
Adhering to this will protect one from the snares of crypto pump-and-dump schemes.
As an expert in financial markets and blockchain technology, I've closely followed the evolution of fraudulent activities in the financial sector, particularly the historical context of market manipulation dating back to the 1700s. One notable example is the South Sea Company in the early eighteenth century, where con artist shareholders utilized false information to artificially inflate stock prices, reflecting a recurring theme in economic history.
Moving into the modern era, my expertise extends to the impact of technological advancements, specifically blockchain technology and cryptocurrency trading, on market dynamics. The article mentions the pump-and-dump strategy, a practice that has persisted and evolved in the crypto space. With the decentralized nature of blockchain nullifying traditional regulatory measures, cryptocurrency markets have become susceptible to various manipulative schemes.
Now, delving into the concepts covered in the article:
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Crypto Pump-And-Dump Groups:
- These groups artificially inflate the price of acquired cryptocurrencies by disseminating false information.
- Tactics involve drawing attention to a coin (pumping) and selling it at inflated prices to uninformed buyers (dumping).
- Operate on platforms like Discord and Telegram, allowing easy accessibility for participants.
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Structure of Pump-And-Dump Groups:
- Often organized in hierarchical structures resembling pyramids.
- Members advance in rank by recruiting new members, creating a pyramid-like structure.
- Some groups have simpler structures with only two levels: VIPs and common members.
- Entry into these groups usually requires payment in Bitcoin.
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Phases of Pump-And-Dump Operations:
- Communication of basic information, including the exchange to be used, start time, and whether the scheme is free or ranked.
- Announcement of the goal coin, with higher-ranked members getting information earlier.
- Spreading news to draw outside investors, leveraging social media platforms, chat rooms, and forums.
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Legality of Crypto Pump-And-Dump:
- While pump-and-dump operations in traditional stock markets are illegal, the legal status in the crypto space is less clear.
- Cryptocurrencies, not being legally considered securities, may not violate existing laws.
- Regulated crypto exchanges, however, treat these activities as illegal.
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Identifying Pump-And-Dump Schemes:
- Investors should be cautious of unusual hype around a project or cryptocurrency.
- Rapid price spikes, especially driven by panic buying, could signal a pump-and-dump scheme.
- Influence from celebrities or influencers may be orchestrated by scammers seeking to exploit market sentiment.
In conclusion, the article emphasizes the importance of crypto investors being vigilant and discerning when evaluating projects. Adopting a consistent and well-thought-out investment strategy is crucial to mitigating the risks associated with crypto pump-and-dump schemes.
