The infamous Pump and Dump scam is simply a form of fraud based on misinformation. The scammers or fraudsters often mislead people and investors as a way of boosting the price of a stock.
They “Pump” the price by promoting it as the next big thing through newsletters, social media, e-mails and when the price is high enough they “Dump” it, hence its name.
Once the price is high enough they sell their shares at these new prices and leave everything in the hands of the new investors, typically worthless securities.
Pump and Dump schemes are not something new. In fact, there are some pretty famous cases like Jordan Belfrot’s, “The Wolf of WallStreet”. Definitely one of the most iconic cases in the history of the stock market.
During the 90’s this was done usually by cold-callers. Now, things are a bit different. The Internet has played a big role in the development of this kind of scam. Due to its nature and the incredible amount of information available it’s now even easier for investors to fall for this if they’re not careful enough.
Bitcoin Pump and Dump
Although the bitcoin market is more stable and mature than what it was a few years ago, it is still prone to artificial inflation. Other cryptocurrencies with less market cap are even more easily manipulated due to their very low prices so you have to keep an eye on all the signs.
Scammers tend to purchase coins at really low prices, something that can take anywhere from minutes to days in some cases. When they have enough coins and they’re ready to dump, the artificial inflation game starts.
The big problem here is that although this scheme is illegal, cryptocurrencies have no legal support so it’s much better just to avoid it.
How To Avoid Falling Victim of Pump and Dump?
#1 Don’t Believe Everything You Read
If you receive an email out of the blue telling you how amazing this new stock is and that “its price is going to skyrocket according to some insider’s information” you should probably ignore it, or better yet, delete it.
If you read about this “insider’s” information in a place you’ve never been before or a webpage that looks obviously scammy, ignore it. No matter how good it sounds. It is better (and safer) to stick with the information provided by people or sources you already know and trust.
Another way you can detect if this is part of a scam is sticking to the rule of gold “if it’s too good to be true, then it probably is”.
A very common characteristic that these newsletters and emails share is the lack of risk presented. You’ll read about how great everything is, but when it comes to risk, there will be little to no information.
#2 Be Skeptical And Do Your Research
Avoid relying on press releases and newsletters that are sent to you by third parties. In fact, you should assume that everything you read from unknown sources is a scam until you can prove it otherwise.
Although this is especially true for the unknown sources and third party emails, there are cases in which this information is sent by paid promoters to convince you of the potential of a stock, even some more legitimate sources can fall victim of this and spread the information .
Another red flag is the period of time in which this occurs. Usually there’s a short period of time in which this information will be spreaded and your email inbox will be full of offers, then it suddenly stops.
Most of the time good research can save you from a lot of troubles. Since any company can pay promoters to tell the world how great and amazing they are, it’s better to spend some time researching the company’s background and verifying claims. In some cases even a simple google search can give you an answer.
#3 What To Look For?
In terms of the traditional stock market an unregulated market is a big no-go. From the cryptocurrency’s point of view this varies a little because in essence, cryptos are unregulated. However, there are still some signs that you can look for.
Although crypto is unregulated, exchanges do have to comply with some regulations. So, before making the first move you should look for information about the exchange, information such as founding date, location and even the people in charge.
If you’re thinking of investing in this new crypto that no-one has ever heard of because you got some insider’s information telling that its price is going to skyrocket, you better think twice. Cryptos with the lowest market cap are usually the most vulnerable because prices can be more volatile and easier to manipulate.
Is the email, newsletter, article, or whatever source of information you find, pressuring you into making a quick decision?
High-pressure tactics are used in this kind of scheme to gain as much strength as possible in the shortest amount of time. This is not the same as a simple “stocks are going up so you might want to purchase before it’s too late” or something like a promotional offer. Usually, the scammers use even dirtier tactics with the only goal of pushing you into buying without giving it much time to think about.
Pump and dump is illegal, but that doesn’t make it any less prevalent. In fact, as the cryptocurrency market grows, this scheme becomes more popular, especially among rising cryptos.
As you navigate in the world of crypto investment you’ll find many cases in which the scam will be obvious, sometimes these attempts of artificial inflation will not be so obvious.
Being aware of the existence of such a scam is fundamental to avoid it, and once you’re able to identify these risks quickly you’ll feel much more confident with every decision you make.