Crypto and Pump and Dump Schemes

What's Pump-and-Dump?

Pump-and-dump is a strategy that attempts to boost the price of a stock through recommendations based on false, misleading or exaggerated statements. The perpetrators of the scheme already have an established position in the company's stock and market their positions after the hype has led to a greater share price. This practice is prohibited based on securities law and can lead to heavy fines.

The Basics of Pump-and-Dump

Pump-and-dump strategies were traditionally done through cold calling. But with the coming of the internet, this illegal practice has become increasingly more prevalent. Fraudsters post messages online enticing investors to buy a stock quickly, with claims to have inside info that a development will cause an upswing from the share's price. Once buyers leap in, the perpetrators sell their shares, causing the price to fall radically. New investors lose their money.
These strategies usually target micro- and - small-cap stocks, as they are the easiest to manipulate. Due to the small float of these kinds of stocks, it does not take a whole lot of new buyers to push a stock higher.

Exactly the exact same scheme can be perpetrated by anyone with access to an internet trading accounts and the ability to persuade other investors to obtain a stock allegedly ready to take off. The schemer can get the action moving by purchasing heavily into a stock that trades on reduced volume, which typically pushes up the price.

The price action induces additional investors to purchase heavily, pumping the share price even higher. At any stage when the perpetrator feels the buying pressure is ready to fall off, he can ditch his shares for a huge profit.

Pump-and-Dump at Pop Culture

The pump-and-dump plot formed the central motif of two favorite films,"Boiler Room" and"The Wolf of Wall Street" -- both of which showcased a warehouse packed with telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a market manufacturer and held a large volume of inventory in companies with highly suspicious prospects. The companies' leaders incentivized their agents with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were pumping up the price through huge quantity selling.

When the selling volume attained critical mass with no longer buyers, the firm dropped its shares for a massive profit. This drove the stock price down, often under the original selling price, leading to big losses for the clients because they couldn't sell their shares in time.

Preventing Pump-and-Dump Schemes

Investors should be skeptical about notices that a stock is going to take off -- particularly when they're unsolicited -- no matter how tempting it could be. Consider the source and check for red flags. Many notices come from compensated promotors or insiders, who should not be reliable. If an email or newsletter simply talks about the hype and does not mention some of the risk, it is likely a scam. Always do your own research in a stock before making an investment.
The Securities and Exchange Commission (SEC) has a few tips to help prevent becoming a victim.
Pump-and-dump is an illegal scheme to boost a stock's price based on false, misleading or exaggerated statements.
Pump-and-dump schemes usually target micro- and small-scale stocks.
People found guilty of conducting pump-and-dump schemes are subject to heavy fines.

Real Life Example of Pump-and-Dump

A study conducted in 2018 analyzed the prevalence of pump and dump schemes in the cryptocurrency market, an area that is predominantly unregulated. Researchers identified over 3,700 distinct pump messages and signs advertised on two popular cryptocurrency messaging boards between January and July 2018, urging investors to buy certain coins.