The Wall Street Journal published an article on August 5 going over the infamous and costly pump and dump groups and strategies that have been plaguing cryptocurrency for years. The Journal detected more than 105 individual groups operating through chat services like Telegram and Discord through their research. These groups have caused over $200 million worth of trade volumes through these actions. But what is the real cost of pump and dump schemes? Who are the victims, and how can you protect yourself from being victimized?
Anatomy of a Pump And Dump
Before we dig in too deep, let’s go over the basics of what a pump and dump is. Pump and dump is a type of financial fraud that has existed since the early days of the stock market. Basically speaking, a group of people will work together to purchase a large amount of a stock or cryptocurrency that has a generally low number of outstanding shares, coins, or tokens. The scheme is also often known to target assets that have particularly low asset prices.
Generally, the architect of the scheme will decide on an asset to target. That person will then simultaneously place a huge buy order for themselves to profit form, and announce the target in a Telegram or Discord group (for cryptocurrency pumps). The rest of the members of the group will be told to buy as much of the asset as possible once the target is announced and hold onto it until a so-called “target price” is achieved. Once the target price is achieved, group members are instructed to sell all of it at the newly inflated price.
According to the Wall Street Journal piece, cryptocurrency pump and dump trades are the most profitable when completed during the first minute after the pump signal is released. Additionally, the pump and dump cycle often completes in a manner of minutes, though in some cases they can last for a few hours or even a few days if enough members of the public also buy in on the inflated price to keep it up.
One recent example of a pump and dump is what happened to Bitcoin Diamond last month.
Two pumps occurred with about 2 days time in between. In each instance, prices more than doubled and then returned to their normal price in a similarly quick fashion.
The True Cost of a Pump And Dump
Some of you may be wondering, who is the victim of a pump and dump? Also, why is it even a crime in the first place? To understand this, we need to understand who the victims of these kind of schemes are. Generally speaking, there are two different types of victims, one innocent, and one kind of asking for it.
The most basic kind of victim is a person who sees an asset suddenly jump up in price and thinks that they can grab on before the asset climbs any further and make a profit. For example, when Bitcoin Diamond increased in price by more than 50% in just a few minutes, someone watching charts could see this and think that Bitcoin Diamond was about to “moon” and so they wanted to get in on it before prices got too out of control. This person then buys the asset at the artificially inflated price, and then holds onto it expecting the price to continue moving upwards, which it very well may not do.
If they don’t sell the asset quickly, however, they are likely to lose a significant portion of their invested value. Some pump and dumps can be so effective that they can cause an asset to increase in price by several multiples instead of just a few percentage points. If someone buys into the top, they will undoubtedly lose nearly all of their investment value.
The Wall Street Journal included information about a second type of victim. In this case, the victim is someone who thought that they could take advantage of the pump and dump group by participating in it. While it may feel like you are getting involved in some secret maneuver, the truth is those that participate in pump groups are often nothing but pawns themselves.
According to the WSJ article, one victim they interviewed said that these groups “[incentivize] the poor followers to keep buying until the [target] price is reached, which it often never does,” and that they “instantly lost $5,000 in about 30 seconds.”
Regulation Not Easy
Pump and dumps still happen in regular stock markets, but they are incredibly rare. That’s because in order to buy and sell stock, you either need to be a registered broker, or have a registered brokerage account with verified ID information. This means that anyone who participates in or orchestrates a pump and dump can be easily caught and punished.
Cryptocurrency pumps are no less illegal by most legal jurisdictions. However, cryptocurrencies are by their nature anonymous and exchanges typically do not require KYC registration with a few exceptions (like Coinbase and others that offer fiat pairs). This means that tracking down and punishing those that are behind the schemes is a lot more difficult, if not downright impossible.
You may also be asking yourself, what’s the best way to protect myself against pump and dumps? The answer to that is twofold, and is fairly simple.
First, obviously don’t join or participate in a pump group. They may call themselves a signals group or a trading information group, but they are all the same. Just remember that these groups are often looking for new members because they want additional money to be poured in so that those operating the scheme that have advanced knowledge can use you and effectively steal your money. While there is a chance that you could make a profit on the pump, your risk of loss is even higher, and of course you are almost undoubtedly breaking the law where you live.
Second, if you see a small altcoin suddenly explode in price seemingly for no reason at all within an extremely short time window, you are almost certainly witnessing a pump in progress. The best thing for you to do is to simply ignore it and move on. If you’re particularly worried about pumps, then your best option could be to simply stick with large market cap assets like bitcoin and Ethereum, as these assets are significantly more difficult to manipulate (although nothing is completely immune to manipulation) simply because they are so much bigger. The amount of money necessary to cause a pump to occur is out of reach for everyone but the wealthiest of the wealthy in the world. And those people would be wise to not break the law simply because the richer you are, the closer you will be watched by your government.