Pump-and-dump is a form of financial fraud that raises a commodity’s price with the spread of misleading information. This scam is not new but it has found a new way to flourish in the cryptocurrency market. A new study has surfaced providing a calculated method to detect these types of schemes. This method will be helpful if there is a time in
Back in the 1700s a bunch of insiders from the South Sea Company started a rumor regarding how good the company was doing. The rumor stated the company could’ve potentially been a trading giant. Even though the insiders knew the company wasn’t profitable they were able to mislead plenty of investors and boost the price of their stocks to historical heights prior to its collapse shaking up the British economy.
The South Sea Company was one of the first recorded situations where a pump-and-dump took place. This type of fraud is usually done by insiders. The ultimate goal is to get your own stock price increased.
Today, pump-and-dumps are considered a form of microcap fraud, including lower priced penny-stocks, because it was assumed that they were easy to shape. Lately, this scam has grown in the cryptocurrency arena who makes a great target due to its lack of regulations.
Pump-and-dumps tend to follow a predictable pattern that consists of three general stages. The first stage is called the accumulation phase. This phase starts when someone purchases a commodity for an extremely low price. The pump phase happens next, which falsely boosts the demand and price of the commodity. In the last phase which is the dump phase, the people who initially purchased the stock start selling their shares, which makes the price drop.
Research has shown that several cryptocurrency pump-and-dump participants coordinate in online chat rooms including Telegram and Discord. These scams are open to the public, so anyone can be a part of them, but profit potential is not consistent. The inconsistency is due to the temporary and unpredictable life of pumps.
The usual process involves a group choosing a coin to pump and then announcing when the pump will happen without stating which coin. When the date arrives, the chosen coin will be revealed and purchasers will rush in to buy it as fast as they can.
Pump-and-dump groups are asked to help boost purchases by spreading the rumor about the coin across all platforms. The goal is to attract trusting investors by exploiting their fear of missed opportunity. This provides a chance for insiders to get in low, knowing what coin will be pumped, and then sell at the peak position for a profit.