Pump and dump scandals are one of the oldest forms of market fraud (think Wovles of Wallstreet), quickly pumping the value of a mediocre asset, to then sell it at an increased price. Its persistence has landed it in the constantly expanding world of cryptocurrency. With blockchain technology, this digital era is creating the opportunity for the “not so ethical” to take advantage of even the most savvy investor.
Pump and Dump – The Inner Workings
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The artificial inflation of a well planned pump and dump is a marketing masterpiece, if laid out accordingly. Usually driven by an influx of social media posts consisting of falsified information and inaccurate hype. This is used to gain the attention of investors in order to garner a possible buy in. This is FOMO (Fear of Missing Out) at it’s very best!
In support of the hype, once investors see this mediocre asset rapidly gaining value, they inherently jump on the bandwagon, as more and more investors start to buy up shares of the stock.
Once the pump has inflated, those whom were in on the scheme from the very beginning, will dump the shares of the overpriced asset. These shares are sold by investors at a peak for much higher than it’s worth. When the asset takes a nose dive, it’s corrects to a more accurate value.
Nurturing the Pump and Dump
What did people do before the internet in order to orchestrate a well-planned pump and dump? It started off with a “old-fashion” marketing technique that we still use to this day…word of mouth. Then came the snail mail and boiler rooms (call centers). These outbound call centers were also excessively used with penny stocks.
Fast forward to the internet, these types of schemes are a breeding ground such unscrupulous setups. Pump and dumps are equipped with endless chat rooms, groups, and messaging apps. This makes it an easy target for quick pumps and monetary gain, provoking even the most savvy of investors.
CTFC Fair Warning
First warning to the public, from the CTFC. This is an advisory letter on the pump and dump scheme- http://www.cftc.gov/idc/groups/public/@customerprotection/documents/file/customeradvisory_pumpdump0218.pdf
The Commodities Futures Trading Commision warns investors to be aware of these pump and dump schemes, and how even the most seasoned investor can fall prey to the lucrative potential of these groups.
Scams like these, the CFTC explained, are not new. They often take advantage of the hype surrounding breakthrough technologies.
|“As with many online frauds, this type of scam is not new – it simply deploys an emerging technology to capitalize on public interest in digital assets,” said CFTC Director of Public Affairs Erica Elliott Richardson. “Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online.”
Cryptocurrency is coming into its own, and is gaining more and more popularity by Wall Street investors, massive corporate investors, and the everyday traders like us. It’s here to stay and primed to flip the entire financial industry as we know it, on its head.
Even though it’s still in the beginning stages of mainstream adoption, it’s still widely open to manipulative schemes. Due to minor regulation and consumer protection in the crypto markets, your best bet is to do your own research on what you’re interested in investing. Only use money you aren’t afraid of losing or can afford to invest for an extensive amount of time.
Tips to Live by When it Comes to Pump & Dumps
- Social media hype should not be taken as fact, remember to always do your own research (DYOR).
- Be careful of marketing ads promising get rich quick pump and dumps. Remember there is no such thing as a free meal.
- Don’t fall prey to market manipulation groups. This is still considered illegal.
- Nothing is guaranteed or risk free, so pay attention to red flags like the overly hyped wording on internet marketing ads.
- Don’t buy or sell on emotion alone. Make sure you do proper technical analysis.
May the crypto force forever be in your favor, and may your hodl stay strong my friends. Have fun riding the waves and always strive to learn more about the continually evolving world of crypto . Good luck!