Crypto pump-and-dump (PND) schemes operate in a fashion reminiscent of the stock market in its early days. During that time, a group of traders wreaked havoc in the markets by manipulating prices through purchasing in large organized groups.
A similar dynamic exists in cryptocurrency markets. A horde of traders drum up enthusiasm for a coin by evangelizing it on multiple channels, including social media. Subsequently, they instigate a coordinated purchasing frenzy for it. As the coins price climbs, other traders, unconnected to the pump-and-dump group, also latch onto the buying spree, further boosting its price. The coordinated action is repeated, except this time around selling the coin, when it reaches a specific price target, causing a sharp decline in its price.
While the pump-and-dump group makes profits, other traders, who purchased the coin based on false promises, are left holding the losses.
Organized Pump-and-Dump Groups
The favored medium of communication for traders involved in pump-and-dump are messaging apps Telegram and Discord. Traders form groups on both platforms. Such groups sometimes even charge a membership fee, usually between $50 to $250 for membership.
There have even been cases of traders choosing to evangelize a specific service to others by signing up for membership on the platform. For example, Binance, a Hong Kong-based cryptocurrency exchange, is a favorite for such operations because it often lists small coins with very low liquidity. This fact has made the Binance platform an ideal candidate for manipulation.
Famous Crypto Pump-and-Dumps
Not all traders in this scheme make money, however. A San Diego-based trader named Taylor Caudle had his story go viral after losing $5,000 in 30 seconds. In less than a minute after placing a buy order on DigixDAO – a coin offered by a startup that claims to back its tokens with gold and listed on crypto exchange Binance – the price dropped steeply and never recovered, said the then 27-year-old Mr. Caudle.
Caudle went on record to state the accusation publicly, saying the notoriously shady exchange was doing things that incentivized followers to keep buying until the [target] price is hit, which is often never done.
However, Mr. Caudle admits that he maxed out a credit card to participate.
Organized pump-and-dump schemes are illegal, but only in the context of market manipulation. Pump and dumps, where people “pump” during an initial coin offering (ICO) and then “dump” when a coin hits the secondary markets are common, and are unfortunately statistically proven to be more profitable than investing long-term.
In 2018, The Wall Street Journal reported at least $825m of crypto pump-and-dump schemes in less than six months. The WSJ reports identifying at least 175 seemingly different pump groups, but, likely, there are probably far fewer. The tendency for pump groups to run out of victims and get a bad reputation for insiders buying up coins in the days and weeks before a pump. With the ever-present need for more victims, each PND group might often be just a differently named circle consisting of the same perpetrators.
Swapfolio – Way Safer Than Uniswap.
We do the hard work for you: strictly APPROVED and VERIFIED projects will have their tokens listed on the Swapfolio App. You can buy, sell, and swap your ERC-20’s with confidence using Swapfolio – we guarantee to screen every project before it is listed.
Disclaimer: Investing in cryptocurrencies and other ICOs is highly risky and speculative. This article is not a recommendation to invest in cryptocurrencies or other ICOs. It is wise to seek the consultation of a professional before making any financial decisions and always DYOR.