Is pump and dump illegal in crypto? An honest opportunity or trap for a crypto investor?

by Alyona Shepilova

If you're a beginner investor, you're bound to come across at least one pump-and-dump scheme at some point. Let's explore how not to lose and maybe even win

'Good evening everyone, are you ready for tomorrow's PUMP? My team and I Promise +5000% and more!'

If you see this message, you know you've found yourself in a pump-and-dump group.

- What is Pump and Dump?

A pump and dump is when people promote a crypto asset as more valuable than it is and drive up its price (pumping) to sell high and profit (dumping).

In a nutshell ā€“ a market manipulation.

- Can you be more specific? How does this pump and dump work?

Of course. The operation has three stages.

1. Preparation: Buying

A person, or a group of people behind the campaign, chooses a coin they will pump. Usually, it's an asset with a small market capitalisation, making it easier to manipulate its price. Often, a relatively new asset. They then start buying it in small quantities to avoid influencing the price and attracting traders' attention. Now they have lots of cheap unknown coins.

2: PR-campaign: Pumping

It's time to make the coin hot. The participants of the pump and dump go straight to social media and start copy-pasting something to the effect of:

On YouTube, 'Cool video, man, I like what you said about the prospects of X. BTW, wanted to ask, whatdyou think about [the coin I'm pumping]? I've heard they're doing great things to [something] and [or other]. I think they're going to become Big. Check them out.'

On Twitter, '[the coin I'm pumping] to the MOON! The next Bitcoin' #CryptoTrading #Lamborghini

Hyping your own community is a must

Now traders are sort of interested and go to the nearest exchange to buy the hidden gem while it's still cheap. The price rises.

Which leads us to:

3. Profit: Dumping. 

The pump-and-dump organisers and those in the know sell what they own and crash the market. They profit, everyone else loses. Sometimes there may be two or three waves of pumping-dumping, where organisers will initially dump a smaller part of their investments for the campaign to become stronger and sell the rest in the second wave.

- Good to be in the know.

Yes, but the outsiders are not the only ones who get to be thrown under the bus.

There are two main types of pump and dumps. The first one is where everyone is on the same page. The participants gather in groups on Telegram and Discord (Free Pump Signals, Great Big Pump, Big Pump, Mega Pump, Trading Pumps, only some of these names are made up) with an explicit attempt to inflate the price of an asset and profit.

The second one is subtler, and we'll get back to it in a moment.

You would think that if you belong to the first group, you're fine. You know how the system operates, so it can't betray you.

In reality, everything happens very fast. Campaigns usually take under an hour, so participants must buy immediately once the coin is made public. Wait a couple of minutes, and it's already too late. That's why many pump-and-dumpers use bots to place buy/sell orders.

Another issue is that no one tells you when to sell. And you better guess and sell before everyone starts dumping and the price drops.

- How do pump and dump groups operate? Are they risky?

The golden rule, the organiser wins. Always.

First, it's them who picks the coin to be pumped, so they have the advantage of investing big and cheaply. They then share the name of the coin with the rest of the group, and the fun part begins.

Your usual pump-and-dump schedule..

Second, the organisers often have a side gig in the form of a tier system. If you want to get a pump signal one second earlier than the rest of the group participants, you pay. Two seconds earlier, you pay more; three seconds earlier ā€“ you pay a lot more. And as we've discussed before, those three seconds can make all the difference. A non-paying user receives a signal, and it's already too late.

- What's a subtler pump and dump?

It's when you don't have a feisty Telegram group to hype the coin but pay influencers and celebrities so they pump it. You can also run sponsored content telling people how good your asset is.

It won't come cheap and will take more than an hour, but the potential reward is much higher. Quite often, in this scenario, you are the coin creator and launched it with the sole purpose of selling an appealing legend. The trick so popular it has its own name ā€“ rug pull.

- How to stay safe from a pump-and-dump scheme?

Pump and dumps almost exclusively target tiny cryptocurrencies worth a fraction of a cent because they're easier to manipulate. 

If you're a beginner trader learning the basics, these are the coins you tend to start with. How not to get tricked?

šŸ”„ DON'T buy into hype, but āœ… DO your own research.

- What's the reason behind the sudden surge in price? Does it follow the market movement? Is it normal for your asset? Check the historical charts and data.

- Be sure to check the project's roadmap and find out whether it has a real purpose. Don't fall for sleek websites ā€“ beautiful scams sell more.

- Find credible news sources and check whether something significant has happened to your coin recently. If it hasn't, the price has no reason to grow unless someone manipulates it.

- Don't believe celebrities and influencers ā€“ they're not crypto experts, and there's no guarantee they don't provide false or misleading information.

- Don't believe what you read in the comment section on social media. They're rarely filled with Samaritans who want strangers to get rich.

- Not investing in newborn projects might also be a good idea. If it spends all its money on marketing (sponsored content, influencers etc.) rather than on development, how good of a project can it be?

And if that feels like an extremely long list, avoid coins and exchanges with low trading volume. Pump-and-dumps strive on them.

But judging by the plunge it took shortly after, they really shouldn't have

- Is pumping and dumping cryptocurrency illegal?

Short answer, no, pump-and-dump schemes are not illegal.

Even though it is clearly a market manipulation, cryptocurrency (still) exists in legal limbo, so it might not violate any laws currently in force. 

However, this doesn't mean there are no attempts to nip it in the bud. For example, the US Commodity Futures Trading Commission proposes to blow the whistle on pump-and-dump schemers and offers a financial incentive for information which will lead to charges and fines. Compared to your regular pump-and-dump, it seems to pay more.

So no, probably no one will be prosecuted just yet, but pumps-and-dumps schemes are still morally grey because the only way to win is to make someone lose.

Fun fact, pump-and-dump schemes are not a Cryptocurrency Original but have existed on the market of traditional finances for quite some time. Only in their case, the schemers used to use cold calls instead of messengers and were/are 100% breaking the law. For more information, see The Wolf of Wall Street.

- Is bitcoin a pump-and-dump scheme?

Bitcoin has a market dominance of over 40%. You would need the joint efforts of all the largest BTC holders to manipulate its price. Pump-and-dump attacks target tiny coins, thousands of places below bitcoin by market cap.

- To sum it up?

Just two things.

1. If something sounds too good to be true, it often is.

2. Crypto investing is a risky business. Don't stake more than you're willing to lose.

Stay safe out there āœŒļø

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