What are Pump and Dump Schemes?
Crypto for Advanced
Ever heard about pump & dump schemes? Also known as ‘rug pulls’, it is when a group of people illicitly inflate or 'pump' the price of a crypto asset, such as a cryptocurrency, to then subsequently cash-out on their maneuver and 'dump' the asset in a rapid manner.
The basic mechanism of pumping & dumping involves the coordinated mass purchase of a crypto asset and thus boosting its value, since the market capitalization grew exponentially in a matter of hours or even minutes, followed by a collective sell-off which crashes the asset price.
To Pump or to Dump
The answer is: None!
Pump & Dump schemes are illegal, since they’re typically being led by scammers which mislead others into thinking that an investment has unbelievable potential for growth. Such scammers deceive crypto traders and steal their victims’ money once they identify a lucrative exit point.
How does it work? Simple. After sharing misleading information on social media or other hubs where crypto traders mingle, it only takes several traders get on board and the train will start moving. The scammers will create groups for the victims, such as on Discord, set a date & time, and even boast about what they would do after getting rich quick.
This is where it all starts. Thousands of crypto traders pour in their money, believing that such opportunity shouldn’t be missed, and the price of the cryptocurrency they invested in skyrockets to say the least.
After several minutes or even seconds, the scammers behind this immoral demise would sell their stake in the crypto asset and thus, crashing the value of the coin back to oblivion. The victims are left with pennies from the hundred or thousands of dollars they invested.
Why are Pump & Dump Schemes Popular?
So, all these rug pulls and illegitimate schemes have caused traders to lose millions of dollars. Why do such schemes remain prevalent in the market?
There are two main reasons:
1- Decentralization and Lack of Regulation
As there’s a lot of decentralized and unregulated activity in the realm of crypto, criminals can easily get away with pump & dump schemes, since the cryptocurrencies are bought & sold anonymously.
Typically, no evidence remains in the crime scene and poof! The scammers disappear and usually, they get away with it nearly every single time.
2- People are Creatures of Emotion
Saying the right thing at the right time to the right person in the right way (too many rights, right?), you can easily manipulate him/her. Since people are creatures of emotion, scammers capitalize on people’s impulsive decisions which can occur from information being presented in an appealing manner.
Given that the value of cryptocurrencies can be heavily impacted by trader sentiment, enough hype can move mountains.
The Infamous Rug Pull of $SQUID Game Coin
A popular example of a vicious rug pull was that of $SQUID Game Coin, which capitalized on the hype of the blockbuster Netflix South Korean show, Squid Game. In reality, the coin had nothing to do with the runaway show. A successful pump & dump scheme saw the coin’s price to soar from a little over a cent to $2800.
A few minutes later, the price plummets once again to a few cents. The scammers behind this organized, theatrical spectacle got away with more than $3.3 million, and the liquidity pool behind the coin disappeared in an instance.
If there’s one thing you would take from this article, be it that if something sounds too good to be true, it probably is. Don’t think of us as party poopers, but more of a company which looks out for its dear traders. Before jumping onto any hype train, research the asset in focus very well; fundamentally and technically.
IF and only if things seem legit, invest a small amount of money at first before diving deeper. BITmarkets is always here for you if you’re unsure about a certain cryptocurrency, project or anything else.
Contact us in a language of your choice and we’ll be glad to help.