Pump-and-Dump Schemes Revealed

What stands for Pump-and-Dump Scheme?

Pump-and-dump schemes are a part of the securities market, and there is nothing to do with that except avoid them skillfully.  

It happens when a group of traders spreads puzzling or false information to impact the asset’s price before selling off their shares at a much higher price. 

That’s when regular investors can lose their money, and it mostly happens when buyers don’t know much about a coin and are tempted by online promotions.

So, “pump” means a stock market fraud that involves artificially inflating a stock price with fake, misleading, or inflated price claims. As for “dump”, it’s a high price received by those who began the crypto talk to raise the price.

Likely, a new stock owner will lose a prominent percentage of their investment since the stock price will suddenly drop.

These schemes are usually focused on small-capitalization companies as they are easy to deal with and do not need a big number of new buyers to drive a stock higher.

If we’re talking about the law, it’s surely forbidden — “To gain money or property by means of any inaccurate statement of a substantial fact or any failure to state a significant truth,” according to The Securities Act of 1933.

But once it concerns crypto, there is no such regulation still. But that’s definitely a gap that should be fulfilled sooner or later. 

How to uncover the scheme

In the past, scammers just loved using cold calling to set up Pump and Dump webs for traders. But that’s not an option anymore, as we have the Internet, we have even more varieties starting with sending emails, spam, and spreading fake news, of course.

Those bad actors send out emails on the Internet forcing investors to buy stock as quickly as possible, assuring that they have exclusive inside information about an impending stock price increase. When traders fall for the bait, the scammers sell their assets immediately, causing the price to skyrocket and new investors to lose their money forever.

Most famous Pumps-and-Dumps cases

The ‘traditional’ Pump and Dump system

The strategy goes around misrepresenting facts about a firm and its activities. It can involve stock presentations over the phone, fake news releases, and the distribution of “inside” information that might influence the asset’s price and force investors to buy it impulsively.

Pump and dump in the boiler room

A boiler room is a small business intermediary with some brokers that use deceptive sales tactics to sell investors high-risk assets. Those dishonest brokers sell cheap stocks that the firm buys or sells as a market maker over the phone. To make their stock higher, brokers in the Boiler Room must sell as many shares as possible. The corporation sells its shares for a benefit as soon as the price goes up.

A “Wrong Number” strategy has been devised

This one is relatively new, and it works by delivering voice messages to those who provide investment advice to a “friend.” If a person who receives the message believes it happened to him by chance, they may fall into the trap by buying the stock suggested by the “UNfriendly advice.”

A phishing scam

A phishing scam asks for your personal information using a link or website that looks like it came from an official source. For instance, if you hold your crypto assets at Binance, you might get an email looking like a Binance recourse that will ask for your login information due to a recent security breach or some other type of urgent matter. Such requests can look absolutely legitimate, so you’ll want to click on a link or respond to these types of requests giving such info as a username and alike.

Ways to avoid scam

Forewarned is forearmed, as the saying goes. So, what’s the best way to stay aside and not be involved in all those schemes above?

Focusing on equities listed on well-known exchanges is a nice thing to avoid a pump-and-dump scheme in the stock market. Why is it so? The matter is that such exchanges have strict listing rules and do not allow pump-and-dump schemes to occur. You’re safe once you stick to well-known and widely used cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) and well-known exchanges like Coinbase, Binance, SimpleSwap, etc. Most exchanges display all of an asset’s orders and the order history. It’s also a yummy piece for fraudsters since they use emails, direct messaging, social media, and phone calls to contact their victims to get money from them by pumping the stock.

First and foremost, don’t neglect the DYOR notion since anyone who knows how to code may easily mint new tokens. If you find a new currency that promises you a fortune, do your homework to avoid pump-and-dump schemes. If it’s an ICO (initial coin offering), the currency should have a clear “white paper” that contains proper information about it.

FOMO is no good; cryptocurrency is still poignant, but it’s also risky – there are a lot of fraudsters out there, and they know you’re anxious for cash. That’s why the bad guys are employing a unique strategy to influence your decision to invest in cryptocurrencies.

Scammers may be hiding on your favorite social media platforms, such as Discord, Twitter, Instagram, Telegram, and alike. Be reasonably skeptical of anyone who starts promoting a freshly issued token; there’s a good chance they’re imposing a fraud.

Be also skeptical of crypto influencers you follow who frequently discuss cryptocurrencies but then, out of nowhere, start advertising a token. Find a real, trusty specialist if you need any financial help.

If the token is still available but the project’s development looks frozen, it’s best to stay away. Pay attention if the project you’re interested in has a clear objective, claims realistic advantages and perks, has a neat roadmap, or is linked to prior bad actors, these are all warning signs.

It is also crucial to have a secure place where you can store all your crypto assets. Use trustworthy, secure, and self-custodial wallets, such as SimpleHold.io, Metamask, and alike. It might be a good idea to avoid using custodial ones. 

There are some specially built programs that detect and reveal such dishonest schemes. Have a look at  Crypto Pump Detector Bot, for example. It can help you to protect yourself.

And finally, remember the golden rule: “Don’t invest more than you’re willing to lose.” You should be aware of the idea that if you make an investing error, you will lose all your holdings.

Bottom line

A pump-and-dump scam is a kind of a necessary evil. It’s a reverse side of the finance sector. Someone earns and someone loses. Fraud and its various faces are common, so there is no need to cry over spilled milk, but it’s better you must be equipped with information and tools that will help you keep the crypto safe and secure. Have a try using a SimpleHold wallet as your everyday crypto-wallet and be safe of the crypto you keep! If you follow the advice we’ve given you here, you’ll be able to avoid the pump-and-dump scams that are popping up all over the place.

Written by: SimpleHold wallet.