"Pump and dump" schemes use manipulative strategies such as making false recommendations to raise the price of stocks or securities by inciting hype to drive up share price - usually through false, deceptive or excessively dramatic assertions. When this drives up share price further, those behind a pump-and-dump scheme sell any existing positions they already hold in that company's stock - profiteering off this practice themselves.
Securities Law prohibits this practice and levies hefty fines against its practitioners. With cryptocurrency demand surging higher and higher, pump-and-dump schemes have proliferated across markets, their purpose being to force down security prices quickly so new shareholders may lose significant sums simultaneously; such practices are considered unlawful under Securities Law.
The Basics Of Pump-And-Dump
Cold calling used to be the go-to strategy in pump-and-dump schemes; now, with widespread availability, most such activity occurs online, where scammers send thousands of emails directly or post online ads encouraging investors to purchase stocks immediately.
These messages often claim that they have inside knowledge about an impending event that will cause share prices to skyrocket, prompting investors to buy shares at sharp increases only for people behind a pump-and-dump scheme to sell off large numbers of shares at once, leading the stock price plummet due to substantial volume sales of these shares and ultimately leading many investors into suffering huge financial losses.
Pump-and-dump schemes often target microcap and small-cap stocks listed on OTC exchanges that are less regulated than traditional exchanges since their manipulation can be easily accomplished. Micro-cap stocks--often associated with OTC trading--are easier for pumpers and dumpers to control because their trading volumes, floating costs and corporate disclosure requirements tend to be minimal, meaning not many new buyers need to be brought on board in order for an increase in stock value to occur quickly.
How Do Pump-And-Dump Schemes Work?
The Journal asserts that cryptocurrency pump-and-dump schemes function similarly to how stock trading worked during its early days: A group of traders caused chaos in these early markets by buying large volumes in bulk to manipulate prices.
Similarly, cryptocurrency markets display similar dynamics: traders promote an asset on various platforms like social media to raise excitement about it and then set off a coordinated buying frenzy on it, driving up its price exponentially while other traders not part of this pump-and-dump group join it as well - further driving its value up even further. Once it hits a predetermined price target, however, coordinated action occurs again to sell off that asset at its full market price for maximum profit from others who bought into false promises but left holding losses while this time the pump-and-dump group profits greatly from such actions by taking over its ownership with more profits going to them instead than them!
Messaging apps such as Telegram and Discord are used by traders engaged in pump-and-dump transactions as the preferred means of communication. On each platform, traders form groups which charge $50-250 membership fees; occasionally, tradespeople join in spreading awareness among others about Binance (based in Hong Kong ) due to its many small coins with low liquidity that make ideal targets for manipulation).
However, not every trader in this scheme is profitable. Taylor Caudle from San Diego was mentioned in a Journal article as someone who lost $5,000 within thirty seconds due to purchasing DigixDAO on Binance-listed DigixDAO, which then fell and never rose back up again - such programs ``incentivize poor followers to keep buying until [target price is reached, which] often never happens", says Caudle.
Investment in cryptocurrency or initial coin offerings (ICOs) should only ever be undertaken at your own risk and with professional guidance; neither Investopedia nor this author advises investing. Each person's circumstances differ, and Investopedia disclaims all liability as to the timeliness or accuracy of data presented here.
Pump-And-Dump 2.0
Anyone with access to an online trading account and the tools to convince other investors that a stock is "ready for take-off" can engage in this scam. By initiating it by purchasing large volumes at low volumes (typically driven up the price by price action), initiators of scam can spark another round of buying, which further drives up its price, prompting other investors to join and push the share price up further still; perpetrator can then sell shares off at their desired profit at any point when buying pressure dissipates - potentially yielding huge profits!
Pump-And-Dump In Pop Culture
Pump-and-dump schemes were the main premise behind two well-known films: "The Wolf of Wall Street" and "Boiler Room." Both movies took place within an atmosphere filled with stockbrokers selling penny stocks through telemarketing agents; both films depicted the brokerage firm acting as a market maker by holding large shares in companies with uncertain prospects whose executives would then reward brokers with large commissions and bonuses for placing it with as many customer accounts as they could; driving up its price through large sales quantities as they went along this process.
Once selling volumes reached critical mass and no buyers emerged, the company dumped its shares for a huge profit at once. Unfortunately for customers unable to sell in time, stock prices steadily decreased below original selling prices, leading to significant financial loss for them as their shares lost value rapidly.
Avoiding Pump-And-Dump Schemes
The Securities and Exchange Commission (SEC) offers advice to avoid falling for pump-and-dump scams, with key points including:
Be Extremely Wary Of Unsolicited Investment Offers
Be very wary when receiving unsolicited communication regarding an "investment opportunity." These unethical pitches could come via emails, comments on your social media pages, direct messages from strangers on your mobile phone or voicemails on the device itself - beware. Following any such offers could end in huge financial losses rather than the profits these fraudsters promise you!
Look Out For Obvious Red Flags
Does an investment sound too good to be true, making extravagant "guaranteed return claims?" Do you feel pressured into purchasing now, before its value surges further? Investors must be wary of stock touts and dishonest promoters employing such strategies as an attempt at duping them.
Look Out For Affinity Fraud
Investment scams that specifically target members of specific groups - like seniors, professionals or religious or ethnic communities - are known as affinity fraud. You might believe an investment pitch from someone within one of your circles, only to discover later it was all an elaborate lie and no genuine deal at all! It is possible you were duped unwittingly into thinking an offer was genuine when, in reality, it was fraud.
Conduct Your Own Research And Due Diligence
Before investing your hard-earned money, always perform extensive due diligence research. Online resources offer plenty of information on respectable businesses' financial statements, management teams and prospects - the absence of this type of data may indicate something is amiss.
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Pump-And-Dump 3.0
Pump-and-dump schemes have found new life in the cryptocurrency market due to Bitcoin and Ethereum's immense profits, prompting an intense interest among traders of other cryptocurrencies of various varieties. Unfortunately, they provide ideal platforms for pump-and-dump schemes due to the lack of regulation within this space and their technical complexity.
In 2018, researchers examined how prevalent pump-and-dump schemes were within cryptocurrency investments. Over six months, researchers observed two popular group messaging platforms used by cryptocurrency investors and identified over 3,400 such schemes within this span of time.
Customers were warned by the U.S. Commodity Futures Trading Commission (CFTC) in March 2021 against pump-and-dump schemes involving newly launched or thinly traded cryptocurrencies, such as those offering financial incentives between 10% to 30% for whistleblowers who reveal original enforcement actions against pump-and-dump schemes resulting in sanctions of $1 Million or greater.
The Federal Trade Commission introduced an incentive system where whistleblowers who bring forth such cases may qualify for 10%-30% financial rewards as an incentive scheme from them and them can receive financial incentives between 10%-30% financial incentives when reported original enforcement action revealed original enforcement action which results in financial sanctions of $1 Million.
Those perpetrators involved - offered from them offering whistleblower financial incentive of 10%-30% or greater provided that original enforcement actions revealed original enforcement action that resulted in $1M or greater sanctions as monetary sanctioning action taken by regulators against them or related companies operating such ICO's has introduced similar scheme by which whistleblowers can receive financial rewards of 10%-30% depending upon revealing original enforcement action that result in sanctions of $1M or greater than this type.
Types Of Pump And Dump Schemes
A variety of pump and dump schemes are available for use by con artists. Among them are the following:
Classic pump and dump scheme
Manipulation of information related to a company and its stock could form part of an elaborate scheme, including fake news releases, stock pitches and the spread of inside knowledge that raises its price. Investors might even be drawn into buying these stocks through dishonest stock promoters.
Boiler room
A boiler room is a small brokerage firm composed of multiple brokers who use unethical sales practices to sell investors dubious investments at highly profitable returns. By cold calling investors directly or acting as market makers, brokers sell penny stocks that the firm then purchases or sells back at higher prices later as profit-making market makers - often at substantial yearly profits! Boiler room brokers aim to raise stock prices; when that occurs, the firm sells more shares at a profit for increased earnings.
"Wrong number" scheme
The "Wrong number" pump-and-dump scheme is an innovative strategy used by con artists to increase demand for stocks they believe have potential. You may receive voicemails from strangers offering tips about potential investments for friends; con artists want you to believe your voicemail was accidentally left there, but this move was designed specifically to attract investors' interest and increase demand for specific stocks.
Understanding Crypto Pump And Dumps
The cryptocurrency market remains unregulated. Numerous exchanges exist and creating new cryptocurrency isn't too difficult; as a result, this serves as an avenue for scammers who pump-and-dump assets as well as lightly traded currencies to profit. An organizer of a pump-and-dump cryptocurrency scheme typically starts by recruiting influential members into an online private group to prevent price spikes from occurring by planning purchases of their desired cryptocurrency asset(s). Influencers will notify their followers on social media when they're ready to trade an asset and gain public backing, leaving public investors as victims while organizers arrange sales - such as dumps - that guarantee everyone gets paid out equally.
This scam often targets cryptocurrency prices because organizers find it simple to acquire thinly traded assets - they simply need to create them. A small amount of research and coding expertise are enough for anyone to launch a cryptocurrency, while many recently established ones remain unregulated - giving individuals or organizations ample room to make bold claims regarding how it will be used, while remaining virtually immune from being held responsible should those promises turn out to be hollow platitudes.
FaZe Clan members launched SaveTheKids as an elaborate hoax in 2021 and scammed hundreds of followers into investing thousands. Once all was said and done, no children benefitted.
How To Spot A Pump-And-Dump Crypto Scam
The cryptocurrency market remains relatively unregulated; various exchanges exist and creating new cryptocoins is relatively painless, providing scammers a platform from which they can pump-and-dump assets as well as lightly traded currencies.
Organizers of pump-and-dump cryptocurrency schemes usually start off by gathering influencers into an online private group to prevent price surges by planning purchases of the cryptocurrency asset in question. Influencers will inform their followers on social media when they're ready to trade the asset and garner public investor confidence in it, leaving public investors without protection as organizers orchestrate an auction-style sale or "dump sale," making sure everyone involved gets paid out equally.
This scam targets cryptocurrency because its organizers find it easy to identify thinly traded assets - they just need to make them themselves. With few regulations regulating newly established cryptocurrencies and no recourse if claims about how the token will be used turn out to be empty platitudes, scammers often turn their attention toward this market for easy gains.
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Conclusion
Always bear this maxim in mind when making investments: "If it seems too good to be true, it probably is." Suppose someone offers you stock tips from strangers without any clear explanation of their source or promise of large, rapid returns. In that case, it should serve as an early red flag, and it is essential that any investment be analyzed independently to avoid being caught by pump-and-dump schemes or similar scams.
