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Can You Spot Cryptocurrency Pump and Dump Schemes?

Updated on April 5, 2018
Bradley Robbins profile image

Bradley Robbins is a former consumer credit-card consultant with a lifetime of experience in trade with North America, Europe, and Japan.

Pump and dump (PND) is a scam most commonly found in inexpensive penny stocks or small cap markets. At its most basic, it creates artificially high sale prices for a time, then those behind the scam sell off their investments at the inflated values and enjoy their ill-gotten gains. These tactics have come a long way from the fax and email bumps of the past.

Today’s PND pros often target the volatile cryptocurrency market. Even without any knowledge of blockchain or Bitcoin, they can trap other investors and make off with tens of thousands or even millions of dollars in value. Knowing how to spot PND scams and what their dangers are can help ensure you’re not left holding the bag when a seemingly good investment suddenly goes pear shaped.

The Pump

In the widely unregulated market of cryptocurrency, it’s a fairly simple task for collusion to occur. Multiple investors, many who may have hundreds or thousands in crypto-related investments, can cause major shifts in small-cap markets. Entire groups dedicated to the PND scam in cryptocurrency have formed on the Dark Web, a series of websites unavailable to Google where personal and credit information has become its own commodity.

These groups offer anonymous members the ability to get in early on the pump side of the scam, investing their own capital to drive up prices. Some charge a fee for this access, while others make their money off duping those who sign up and don’t get out of the investment in time. The purchases made during the pump period cause the price of a cryptocurrency, typically a small-cap altcoin, to skyrocket.

The Dump

At a predetermined period, typically only a few minutes after the pump starts, those who started the scam sell off their investments. These typically make up the bulk of the purchases, which means those who are now just seeing the spike and “getting in on it” are paying the sellers who are getting out. This often results in a stall in the market, where the moment-to-moment value of the stock remains flat.

The stall may last only a few seconds before everyone realizes that the upwards trend has completed and begins to sell, sending the price plummeting. Most PND scammers have two selling periods, one reserved for group leaders, and the other which is publicly announced to the group after the leaders have taken profits. A third selling period exists for those who are outside the group and have to rely on market indicators to know when to take profits and get out. Those investors are usually left dealing with the fallout of the scam.

The Fallout

Those left holding the bag, especially if they purchase near the end of the pump phase, can have devastating losses as the cryptocurrency plummets down to or past its original value. Traders outside of the scam may have thought the coin a good investment as they saw its value rise dramatically, and they’re the ones most likely to be stuck with a purchase valued far below the price they paid for it. This can leave investors soured on an otherwise solid mid-to-long-term investment due to the experience with the PND scam.

The hallmarks of such a scam are often easy for experienced investors to pick out, a sharp rise in both volume and value followed by a short stall, but some investors who aren't risk-adverse may be attracted to the siren’s call of an apparent easy win. If a small-cap currency suddenly spikes with no support in the form of news, announcements or signs of a market correction, it’s likely a PND is at work. This is doubly true if the volume of trading on the currency is much greater than in previous weeks, days or even hours. The cryptocurrency world moves fast.

Riding the wave from the bottom and getting out as soon as the market seems to peak is a very dangerous game, and investing after the spike starts is especially risky. It’s often best to let the market settle after such a spike or, ideally, to sell off your existing assets in that cryptocurrency without buying more. Then, move to a different market for a bit, as the fallout could last weeks or even months if the PND is bad enough.


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