Crypto Pump and Dump Schemes: What to Do When It Happens

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Like the Wild West of securities, cryptocurrency trading is constantly growing and changing. The cryptocurrency market is essentially a new, rapidly expanding frontier. With far-flung interest, cult-like followings, and celebrity endorsements, these assets are dominating investment conversations. 

Bitcoin, the largest and most prominent cryptocurrency, consistently has over 150,000 daily Twitter mentions and has been featured on Fox, Bloomberg, Forbes, and The Wall Street Journal. There are now at least 100,000 crypto millionaires among us. 

But just like the Wild West was, it’s a lawless place full of uncertainty and greed. Many would-be millionaires are taking advantage of insufficient regulation to employ tactics that are illegal in other markets. One such scheme currently flying under the regulation radar is the pump and dump.

What Is a Crypto Pump and Dump Scheme?

The idea behind a pump and dump scheme is simple: A group of bad actors deliberately buys an asset, often small-cap stocks or other thinly traded securities, sings its praises to anyone who will listen — using false news or information (pump) — then sells when the increased activity drives up the stock price (dump). This often leaves those who bought the hype holding the bag, as asset prices crumble and artificial demand dries up.

Once done over the phone in boiler rooms, like in the movie The Wolf of Wall Street pump and dump schemes now have the internet and robo traders fueling these schemes. The underlying strategy is still the same: buy a low-volume asset, pump up its potential returns to investors on message boards, group chats, and social networks, promise huge returns, and then dump the position when the buying starts and the price spikes. 

The main difference today is that the timing between getting in at the bottom and holding the bag at the end can be less than five minutes. It’s rarely more than a day or two. The below graph shows what happened to Mimosa (MIMO) earlier this month.

Mimosa Price Chart
Mimosa Price Chart (MIMO) on Coingecko

As you can see from the example above, on Sunday, July 11, the pump started. Bad actors in the pump group took to message boards with false information to drive up the price. With volume increasing 10x over the previous week, this frenzy pushed up the price, normally around $0.20, to a high of around $0.87. However, the 340% increase evaporated almost as fast as it had arrived. 

By Tuesday morning the price was back to $0.20, and over $750,000 had changed hands. The only investors left with a profit were those who had sold during the hype, with many accounts deep in the red, holding a coin with no real value. Low trading volumes mark the end of the dump scheme.

How Does Crypto Pump and Dump Work?

The pump and dump scheme is just old wine in new wineskins: it’s been around for ages. The scheme’s strength lies in its simplicity. 

The first step in running a cryptocurrency pump and dump is finding the asset. It needs to be something with low volume: because the crypto asset is thinly traded, it’s more likely to react favorably when volumes increase. Market manipulation is more likely to work on these types of coins than those with high or average trading volumes. It’s also often a coin that has recently been issued through initial coin offerings (ICOs). It’s easier to create a positive spin on an unknown asset than one with years of historical data. Many investors are looking for the next big digital coin, so picking a new “up-and-comer” makes the scheme easier to pull off. 

Bad actors, especially those on Discord’s internet platform, often try to find coins without a short interest so there’s no downward pressure on the pump target. Ideally, the schemers are able to pick an asset with a relatively stable price, so that in the event the manipulation scheme doesn’t work, the asset can be off-loaded without the potential of a loss from volatility.

Once the target has been identified, bad actors begin slowly buying up available coins. The goal is to amass a large position slowly, so as not to spike the volume or tip-off others. This can be done over days or weeks, in order to keep the price stable.

Now comes the pump. Due to the history of pump and dump schemes, and the ability of investors to research claims quickly, new tactics are being employed. Current scammers go on Discord, Telegram, or other chat groups to suggest that groups participate in a pump and dump. 

For example, groups like Voyager Pump or Galactic Pump will promote coins on Discord for their members to pump and dump. They pitch that they’ll receive the coin to pump from an algorithm or bot so that nobody can get in early. They often also sell VIP access, where those paying for the information get the target 5 to 10 minutes before the rest of the members of the group. In reality, the coins have already been purchased, and there is no algorithm. This just manipulatively creates the perception of a “fair” scheme to participants. 

When the group now purchases the coin in what they believe is a pre-pump market, the perpetrators of the scam off-load their holdings. The Discord accounts will count down to the dump, creating a time limit and FOMO (fear of missing out) for investors. 

Encouraged by deliberate misinformation and rising prices, many more traders jump in, causing the price to rise even faster. The excitement and hopes of further gains reach a crescendo. The group members flood the market, trying to get some coins before, they believe, the information is to be released to the general public. 

With the asset now at a much higher price, the conspirators behind the initial buying and publicity start to off-load their holdings, making substantial gains in the process.

By the time the information has reached Twitter or Reddit, the scheme has already taken place, and the rest — hoping to profit from the illicit scheme — are instead left holding the bag. The poor folks who joined the party rather late are stuck with now worthless assets and no buyer in sight. The scheme ends here — and the group moves on to the next one. 

This is how a standard pump and dump scheme works. Of course, the process can take many forms, and there are nuances, but the principles are the same.

Below is an example of how Rocket Pump was able to use its members to increase volume. Notice how the spike occurs within 5 minutes of the announcement, and then dramatically rises prior to the announcement, probably from “VIP” members paying for early information.

Image courtesy of Crime Science Journal

Now, it’s hard to feel bad for someone who gets scammed while trying to scam others, but sometimes the victims are innocent bystanders, unknowingly trying to find the next big thing. There are also instances in which investors utilize their stature to pump coins. In one example, the late John McAfee allegedly used his Twitter account to make over $13 million in various pump and dump schemes. 

Starting in December 2017, he promoted a “Coin of the Day.” These coins were obscure, often low volume, and each saw a substantial spike after his endorsement. Take, for instance, Electroneum (ETN, shown below). On December 21, 2017, just minutes after his tweets praising the coin, the market cap for the obscure new asset doubled. Investors piled on to get a piece of “the holy grail of cryptocurrency”, as McAfee described it.

With Electroneum and other assets, he was either holding the coins without disclosing his interest or being paid by coin issuers to promote their ICOs. In March of this year, a few months before his passing, McAfee was indicted on securities fraud and money laundering charges for his role in the scheme. This was a statement move by regulators in an area that has been thinly prosecuted.

Now that we know what a pump and dump scheme is and how it’s orchestrated, how do we recognize when a coin is just popular and trending — or actually the vehicle for a scheme?

How to Spot a Crypto Pump and Dump Scheme

The easiest way to spot a pump and dump is to start by understanding its mechanics. If the value of a relatively unknown coin rises suddenly without reason, there’s a good chance manipulation is at play. It’s always best to do some digging before making a purchase. Avoiding rushing into a project before you’ve researched it. 

If you wait a little bit to invest, you may lose out on some return, but having greater confidence in your investment will give you assurance in the long run. In the case of a pump and dump, the extra time might even save you from holding a wallet full of worthless coins. 

At the end of the day, here are the five main symptoms to look for.

Monitor the Price Movements

A prime feature of pumps and dumps is their sharp price movements. While price swings can happen with any coin, during pump and dump a coordinated action among a party of schemers is occurring. A coin’s value starts rising quickly for no discernible reason, and then later falls just as rapidly with no obvious explanation.

Looking at a coin’s price chart can tell you a lot about its volume changes and price history. There are also online trackers who will alert you to potential pump and dump schemes. Walletinvestor.com tracks any rise of over 5% within a 5-minute period to alert users to potential scams.

Promotion Source

Pump and dumps are often coordinated schemes masterminded in online chat groups. Known pump and dump groups can be followed, though some may charge for timely information. The number of people in one of these groups can be as high as 200,000, though smaller groups can have about 2,000 individuals. Relatively anonymous and private channels on Discord and Telegram are often used to coordinate such schemes.

Vetting the source of your digital coins info is key to spotting rogue tips. If you see known perpetrators shilling the coin or many posts from unscrupulous sources related to a less popular or risky coin, there’s reason to be wary. If a low market cap coin suddenly starts trending on Twitter or popping up on Facebook ads, and then you get an unsolicited investment offer, you might also want to exercise caution.

Groups that offer crypto trading signals may just be perpetrating pump and dump schemes. They’re trying to appeal to beginners who may have limited trading experience. After getting their trust, they may charge fees for their trading signals, but it’s impossible to know where those signals come from and whether they originate from manipulators. 

Influencers come in all shapes and sizes. If a random influencer with a questionable background, who doesn’t have cryptocurrency experience, suddenly starts promoting a coin, be skeptical. Many promoters may also promise guaranteed returns. Be wary of any promises of free money and returns. If it sounds too good to be true, it usually is.

Keep an Eye on the Trading Volume 

Thin liquidity, otherwise known as thin trading volumes, usually means order books aren’t full of buyers and sellers to stabilize pricing. Market makers may not have much interest in a particular name to keep creating buy and sell orders. As a result, it’s easy for the price to spike well past typical levels, especially in a short period of time. Any asset with thin order books is more prone to price and trading manipulation.

Market Capitalization 

The market capitalization of a coin is calculated using its price multiplied by the supply. Pump and dump groups target low market cap coins more frequently because coins with smaller supplies also often exhibit less trading activity. These smaller coins are subject to price manipulation by groups of bad actors.

Regulations

Exchanges that are less regulated are often more vulnerable to pump and dump schemes. Analysis has found that pump and dump schemes are found relatively more frequently on exchanges Binance and Bittrex, compared to heavily regulated U.S.-based exchanges. Often, the price and volume spikes occur on a single exchange, rather than several exchanges.

If you encounter the above symptoms, it’s likely you’re witnessing a pump and dump.

Pump and Dump vs. Rug Pull: The Differences

As with any financial scams, cryptocurrency scammers and fraudsters try to use illegal or unethical ways to trick others into handing over hard-earned money. One common scam to look out for is people offering a service or product — but only accepting crypto as payment. Because crypto is hard to trace and can’t be refunded without the recipient’s permission, it’s the perfect currency to receive as a scammer. 

Another red flag is any website or communication that promises guaranteed returns. Returns are never guaranteed! Anyone saying otherwise is trying to sell you something — and separate you from your crypto. For more information, the Federal Trade Commission (FTC) has put together a short guide on cryptocurrency scams to alert investors.

Another large scam that has taken off is the rug pull. This is the creation of a crypto project by a developer whose sole purpose is to run away with investors’ money. As with a pump and dump, they’ll spend their time advertising the coin to whoever will listen. They’ll often pay for advertising on large websites with high traffic as well, in order to increase the hype. 

Rug pulls often happen on decentralized exchanges (DEXs) with low oversight. Scammers create a coin to list on a DEX, tie it to another cryptocurrency such as Ethereum, and then pump it all over the internet. After a group of unsuspecting investors exchanges their legitimate crypto for the new coin, the bad actors cash out the liquidity pool, creating a worthless asset. 

Sometimes the hype phase of a rug pull will look like a pump and dump, as the creators drive up the price to create FOMO and cash out, targeting more victims. To avoid the rug pull, look for liquidity and lockups in a token pool. If there is little liquidity or no lock, it’s best to give the new coin some time before investing in order to make sure you don’t fall victim to this scheme. You also need to fully research coins before investing, which we’ll discuss more below.

Can You Profit from Crypto Pump and Dump?

Pump and dumps result in large swings in price movement, which can produce large gains. Profiting from pump and dumps, even unknowingly, is possible if you’re on the right side of the trade. If your timing isn’t right and you get caught on the wrong wave, you might have trouble profiting from pump and dumps. 

Spotting a pump and dump strategy requires having enough confidence that the group you’re following will be first to the punch and artificially inflate prices. You’ll also need to be able to exit the trade in time to make money. 

To minimize losses, you can set a trailing stop loss that helps you exit a position in case prices quickly move sharply downward. This means setting a sell order at a specific price to keep any losses minimal, removing your position in the coin. Otherwise, if you hold on to a position for too long and exit slowly, you may end up a victim of falling prices from the dump.

Is Crypto Pump and Dump Illegal?

With all the news and hype around cryptocurrencies, aren’t there laws in place to protect consumers? The answer is: yes and no. Most countries have some laws on the books regarding intentional fraud. 

For example, in the United States, the Federal Bureau of Investigation (FBI) has an internet crime complaint center which monitors online fraud. However, due to the nature of cryptocurrencies, it’s hard to nail down which body regulates them. Depending on the regulatory agency, a cryptocurrency can be considered money, property, security, or a commodity. This means it’s regulated by either the Internal Revenue Service (IRS), the Commodity Futures Trading Commission, the Securities and Exchange Commission, or the Financial Crimes Enforcement Network (FinCEN). 

Pump and dump schemes are illegal in stocks. But in general, current laws regarding pump and dump schemes don’t apply to cryptocurrency exchanges and coins that aren’t classified as securities. This could change in the future, but for now, the regulatory vacuum creates a gray area in which pumps and dumps operate in cryptocurrencies. 

One possible hangup right now for schemers in the U.S. The IRS has been tasked with overhauling how it looks at capital gains, so perpetrators of the schemes may run into issues if they don’t pay taxes on their ill-gotten profits.

Things to Consider Before Diving into a Crypto Project

In general, investing in cryptocurrencies — as with any investment — comes with risks. Any cryptocurrency could potentially be stolen through hacking attacks, phishing scams, malware infections, and other methods. Hackers may use stolen credentials to access accounts and withdraw funds. 

Trading bots are good to help increase revenue and reduce losses and risk. But it can scary if it’s used for other purposes, eg, to hack cryptocurrencies. These automated scripts run automatically, without human intervention. A bot may try to exploit vulnerabilities in an exchange’s software or hardware infrastructure. It could even launch denial-of-service attacks against an exchange itself, disrupting trades and putting coins held in hot wallets on the exchange at risk.

Crypto Fraud and Theft Statistic
Crypto Fraud and Theft Statistic by Statista.

According to Statista, the global losses from crypto fraud and crime were estimated at over $513 million in 2020, which was about a $205.3 million increase from 2019.

Before investing in any cryptocurrency project, you need to evaluate each one independently. Use fundamental analysis to analyze the digital asset, keep a sharp eye on the team involved in the project, and do your due diligence on its developers, advisors, and investors. Who are they? What background and experience do they have? Do they appear to be able to work together? Is there the mix of technical expertise and business savvy necessary to market and run a successful project?

Understanding the project’s supporters is also critical. Are marquee venture capital investors with strong track records committed to the project? Reputation sends an important message in the crypto community, and having the right backing goes a long way. Social media can also indicate the amount of interest in a project, and keeping tabs on its community’s strength is a key indicator.

Read the currency’s white paper thoroughly, because it provides detailed information on your investment along with timelines, technology used, and objectives. Consider the importance of the problem the project is solving, whether market demand exists for the solution and how big it will be and whether the project has a unique approach that’s not already in place. Although cryptocurrency solutions may be novel, you need to consider competitive solutions from all realms, including traditional technologies.

Technically speaking, how sound is the project? You should actually be able to view the source code of your project online, perhaps on GitHub. Even if you aren’t savvy with code, try to verify that the code has been checked and approved by a third party.

Marketing and creating hype surrounding a cryptocurrency is an important method for building a community of avid supporters who will invest in and support an asset long term. If no one knows about the project, finding token buyers will be difficult. Sustainable marketing efforts are higher quality and generate followers with strong reputations, creating a “virtuous cycle.” Sometimes, promising projects can build a community organically, partly through word-of-mouth. But it’s most likely that projects have also spent funds on marketing. Seasoned marketers with a clear understanding of marketing tactics usually need to direct such efforts.

Closing Thoughts

Ultimately, the uncharted space of cryptocurrencies offers both danger and reward. And just as in the Wild West, those willing to brave it could come out millionaires — or end up dead broke. There are people around every turn trying to take your hard-earned money, but there are also communities genuinely interested in regulating technology and keeping investors safe.

Most online platforms dedicated to cryptocurrency investment discussions don’t endorse or tolerate pump and dumps. Reddit’s cryptocurrencies subreddit, a group with over 3.3 million subscribers and 100 million interactions, has a strict rule against hyping any specific coin or investment. Their rule #3, no manipulations, reads, “No pumping, shilling, or FUD (fear, uncertainty, doubt),” and is heavily moderated to maintain compliance. With many investors getting wise to the schemes, the returns from pump and dumps are falling as well.

However, pump and dumps are more or less open secrets and recurrent strategies on thinly traded coins. It may be hard to separate enthusiastic supporters who don’t have much credibility from a schemer. Even Elon Musk has been quoted as saying that he “pumps but doesn’t dump,” because the strategy has become familiar to the average cryptocurrency investor. 

In October of last year, the U.S. Department of Justice released a report outlining an Attorney General’s Cyber-Digital Task Force to combat schemes. With regulatory and investor focus, crypto pumps and dumps will hopefully go the way of the boiler rooms, leaving us with stronger and safer markets for the future.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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