The pump and dump is a very common scam that refers to the artificial and intentional appreciation of an asset, supported by false promises, to later sell it and make a profit.
Financial scams can take many forms and are as old as money itself. Digitization in recent decades has brought with it new risks from which it is important to protect ourselves. When it comes to cryptocurrencies, this takes on even more importance, as their decentralized and anonymous nature makes them a new hotbed for scams.
How do pump and dump scams work in crypto?
First of all, a group of people get hold of a large percentage of a certain cryptocurrency development either by creating it or by buying a large amount. In the next step, they use different marketing strategies to popularize the currency and make many people buy it, increasing its price.
When they already have a considerable profit, they suddenly sell their share and drastically drop the price from one moment to the next. In those cases, most of the cheated users lose their money.
Is pump and dump legal ?
The act of manipulating investors through false information is illegal and punishable by fines, penalties and even imprisonment. In the United States, the body in charge of regulating financial fraud is the Security and Exchange Commission (SEC) and it recognizes pump and dump schemes as financial fraud.
However, in the case of cryptocurrencies, it is very difficult to enforce these regulations. This is because, in most cases, we do not know the identity of the scammers.
An emblematic case is that of Jordan Belfort, the famous stockbroker played by DiCaprio in the movie “ The Wolf of Wall Street ”. Precisely what they were doing in the film was convincing unsuspecting investors to invest in stocks of small companies with very little volume. When the price of these shares rose due to this new demand, they sold their share and kept the profit. Jordan Belfort ended up pleading guilty to fraud and was sentenced to 4 years in prison as well as a $110 million fine.
At that time, as the film shows, they had to call each person one by one to tell them about this "new investment opportunity." Today, through the Internet, scammers can reach millions of people without much effort.
How do pumps and dumps usually develop in crypto?
These schemes mutated over the years to adapt to changing market conditions. In the strong bull market of 2017, with the great popularity of Initial Coin Offerings (ICOs) , this was the scam method par excellence.
The modus operandi was as follows:
- They were writing a white paper detailing the incredible potential of a new protocol that was going to hit the market.
- They executed a marketing campaign publicizing this innovative project.
- They did an ICO and sold project tokens.
- Once the money was obtained, they abandoned the project and disappeared.
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Bitcoin/ BTCIt has been over a decade since the mysterious Satoshi Nakamoto created Bitcoin, the first and by far most popular form of cryptocurrency in the world.
Bitcoin has enjoyed a price surge to more than $40,000 in January 2021, for a market cap of more than $1 trillion, meaning bitcoins accounted for more than 69% of the cryptocurrency market.
Ethereum/ ETHSince 2021 began, ETH has been surging up strongly, breaching the $1,400 level and reaching a new all-time high.
Ether has become one of the most popular cryptocurrencies in the world, with a market cap approaching $139 billion that puts it second only to Bitcoin in market share.
Bitcoin Cash/ BCHAt the start of 2021, BCH rose on a bullish note from $340 spiking to $680 by the end of the January.
The coin which is considered to be a good investment for the longer run, has started 2021 with an opening price value of $124.67 and it is highly expected to peak at $ 487.26 by the end of the year.
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