Pump and Dump Schemes: A Comprehensive Summary
- Arav Wahi
- Sep 21, 2022
- 4 min read
Following the hit Netflix show Squid Game, a new cryptocurrency called Squid ravaged the market, soaring in value by 14,300,000% in a single week. However, after a very abrupt rise to fame, Squid subsequently lost 99.9994% of its value and plummeted to a measly $0.003 value. The entire spike and drop of Squid happened in 7 hours: 6 hours to spike to its high and 1 hour to lose all its value. While some might pin this short lived fame to volatility in the market and short selling, it boils down to a much deeper, longer-occurring, and more concerning conflict—pump and dump schemes.
What are Pump and Dump Schemes?
A pump and dump scheme, or a pump and dump, is when the price of a stock or currency, as a result of misinformation and misleading statements, is artificially increased. Once the price has risen to a certain amount, the person conducting the pump and dump will sell all their shares and maximize their profits, causing a sudden plummet of prices as seen with Squid. Historically, pump and dumps have been rampant in the stock market and have been responsible for major scams. They have, however, been gradually regulated and are now illegal in the market. But while pump and dumps are now unheard of in the stock market, the unregulated cryptocurrency industry is still at risk, and it has witnessed multiple pump and dump schemes throughout its tumultuous history.
Who Executes These Schemes?
A pump and dump scheme is conducted by a person attempting to attract investors and convince them to purchase penny-cryptos, typically through false information like incorrect financial reports or false statistics. This attracts and latches investors onto the currency without them thoroughly researching or understanding the magnitude of their investment. As the price of the currency is ‘pumped’ up, more and more investors join in. Though once the currency reaches a price the scammer deems adequate, they quickly ‘dump’ all of their shares, taking with them most of the currency’s value. By the time investors realize they have been misled, it is too late, with almost the entirety of their investments and the resulting profits already in the hands of the scammers.
How Do These Schemes Achieve Success?
The key to pump and dumps’ success is that they operate swiftly, with operations occurring as quickly as within six hours. This makes it difficult to reverse the actions of scammers and gives potential victims minimal time to realize their mistake. Also, with roughly six thousand penny cryptos like Squid in the market, it can be difficult to identify those which are arbitrarily being pumped up. However, paranoia is as bad as naïvete. Most cryptos that are valued highly (both on a literal and symbolic level) were originally valued at less or close to a dollar and stayed that way for a long period of time. Currencies like Bitcoin, Ethereum, and Binance all remained at the penny-level for years before surging to popularity. Given this reality, investors face a dilemma. Should they choose to invest in few cryptocurrencies and potentially miss out on lucrative opportunities like Bitcoin’s rise, or invest in many penny-level cryptos and bear the risk of being scammed by artificially pumped up currencies? Either choice can have detrimental consequences for the investor, and is a major reason why many are hesitant to turn to crypto.
How to Dodge These Pump and Dump Schemes
However, how does one avoid being tricked by pump and dump schemes? When one is directly contacted, for example via email, to invest in a new crypto currency, they are typically receiving an invitation to pump and dump. This is since cryptocurrencies never directly contact people and ask them to invest in their currencies. Moreover, if that stock has abnormal surges in prices attributable to more than just volatility, it is being pumped. Lastly, if the crypto is extremely small and concrete information on its performance and reliability is hard to come by, it warrants suspicion. These are signs to stay away from investing in a specific currency and to advise others to take similar precautions as well. Pump and dumps can be very deceptive and punishing, and are unfortunately quite common. With that in mind, however, they can still be detected through certain precautionary measures, and have been decreasing over recent years due to increased investor knowledge of the dangers and warning signs of pump and dumps.
What Does This Look Like in the United State’s Government?
Democrats and Republicans typically are similar in the viewpoint to this issue, as cryptocurrency is not currently regulated, the government can take no action. While some democrats advocate for such bills being passed, no decisive action has been taken and hence it remains on the Federal back burner. While free speech isn’t a unanimous topic in the US, misinformation over Pump & Dump schemes stirs discussions over whether it should be allowed. However, due to a majority pro free speech congress, it is unlikely to change any current laws on the topic. However, on the topic of free speech, where misinformation from pump and dump schemes arise is also mostly in favor, with a few on the far sides of both the left and the right arguing against free speech, but a majority in favor of it renders any action unlikely.
So, How Can You Take Action?
Report any suspicious currencies or activity to the Security and Exchange Comission (SEC)
Use Cipher Blade for any necessary legal action related to Crypto Frauds and theft
Works Cited
“Blockchain Investigation Agency.” CipherBlade, 15 June 2022, https://cipherblade.com/.
Dhir, Rajeev. “How a Pump-and-Dump Scheme Works.” Investopedia, Investopedia, 10 Feb. 2022, https://www.investopedia.com/terms/p/pumpanddump.asp.
“How to Avoid Pump and Dump Schemes.” SEC Emblem, 12 May 2017, https://www.sec.gov/complaint/select.shtml.
“Pump and Dump Schemes.” Pump and Dump Schemes | Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes.
“Squid Game Price Today, Squid to USD Live, Marketcap and Chart.” CoinMarketCap, https://coinmarketcap.com/currencies/squid-game/.
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