1. What is Pump & Dump?
Pump and Dump is a manipulative scheme of cryptocurrency appreciation followed by a price collapse. Large owners of assets artificially increase (“pump”) their value in order to sell later (“dump”) as much as possible to small traders. As a result the value of the assets goes down and investors lose their money.
The pump & dump scheme emerged in the securities market long before cryptocurrencies. The first documented episode of this fraud was the scam of the British South Seas Trading Company, which inflated the share price with untrue promises of profit in the early 18th century. This led to the so-called South Seas bubble.
Subsequently, dumping was widely used in the U.S. market of “junk” or “penny stocks” (cheap securities with low market capitalization) during the Great Depression in the late 1920s and early 1930s. At that time, brokers sold cheap stocks to each other, which led to an increase in demand and prices, after which the shares were thrown on the public market. In the U.S. such a practice was made illegal. The heyday of the pump and dump schemes at the stock market came in the early 2000s.
In virtually unchanged form, the pump & dump spread to the cryptocurrency market as well. The lack of regulation contributed to this development. Currently, there are about two thousand “junk” cryptocurrencies. Messengers and social networks have a huge audience, so the pump & dump scheme is extremely popular on the crypto market.
During the existence of cryptocurrencies, tens of thousands of pump & dumps have taken place. According to experts from Imperial College London, at least two fraud schemes of this type are realized every day, and the monthly profit of the organizers averages $7 million.
2. How does Pump & Dump work?
Having chosen an exchange and a coin, the organizers buy up tokens in small portions so as not to provoke a premature rise in the exchange rate. As a rule, these are little-known cryptocurrencies with low capitalization, commonly known as shytcoins. Sometimes, relatively large cryptocurrencies are also used for pump & dump.
After a token is bought, it is pumped. Messengers, news feeds, social networks, and exchange chats announce the imminent growth of the rate and announce the name of the exchange site, where the organizers of the pump through their bots place and pick up large orders to buy the token, raising its quotation. This is the first wave of the scam.
Most major bitcoin exchanges restrict such activity, and the coins in their listings are rarely suitable for the scheme. But there are popular exchanges that support more than two hundred coins – these are the ones that attract fraudsters in the first place.
False infomercials about partnerships, investments, or technology updates are used to warm up buyers. Paid “experts” join the disinformation campaign. “Sensational” information is distributed mainly through Telegram channels. At the same time, most of these channels directly report on the pampa, promising profits.
Investors are then assured: since they know about the pampa in advance, they will be able to make money. In fact, they are already victims, and some of them even pay for subscriptions to such pamp channels.
If the advertising campaign is successful, the second wave of the pump starts: outside investors come in and influence the growth of the exchange rate on their own. Amid the excitement, the price rises, the organizers sell tokens at an inflated value, after which the cryptocurrency rate returns to the initial indicators.
3. What are the types of Pump & Dump?
Cryptocurrency Pump & Dumps are divided into long-term and short-term.
- Short-term pumping lasts a few hours or even minutes and is applied in the case of little-known cryptocurrencies with low capitalization. In the course of a jump, their value rises rapidly, holds a position for a few seconds, and then falls just as quickly. The financial expenses of organizers of such a “pumping” is relatively low – the average “pumping” of the rate costs 50-60 BTC.
- Cryptocurrencies from the first twenty are chosen for long-term sellers. As a rule, it lasts several days, and the ups and downs of the rate occur in several stages. Organizing a large cryptocurrency pump requires significant financial expenses, so large players or communities of traders are engaged in it.
4. What are the distinctive signs of Pump & Dump?
- Revival of exchange activity (appearance of large buy and sell orders) and rate growth in the absence of positive news;
- Absence of similar price growth on other exchanges, where the cryptocurrency is traded;
- Active cryptocurrency advertising campaign in exchange chats, forums, social networks and/or Telegram channels.
5. Is it possible to earn on the Pump & Dump scheme?
It is practically unrealistic to make money from short-term pumping: profit is possible only for the organizers, ordinary traders simply do not have time to react. Consequently, there is no point in subscribing to the Pump & Dump channels on Telegram with an audience of several thousand people.
Theoretically, it is possible to make money on long-term scalping: the trader can count on profit, but in this case, the trader has only a few minutes to place an order. And the probability of losses is equal to the probability of profits.
Most pumps have one predictable feature: after the first fall there is a new short-term growth due to the fact that retail investors are involved in trading. After a trader sells tokens at a loss during the collapse, he can buy them at the low and sell them during the second rise.
Buying coins during the second upturn is a guaranteed loss. Secondary price peaks are typical only for rather large coins with capitalization of at least a million dollars.
6. Examples of Pump & Dump
On the night of November 5, 2019, the price of the ParallelCoin token rose thousands of times in a matter of hours (from $1.60 to more than $2200), giving users a chance to talk about the emergence of the “new bitcoin.” Hours later, the price returned to the $2 level.
The rise in the price of the LINK token was preceded by Twitter posts about the collaboration: on June 13, 2019, Chainlink announced a partnership with Google Cloud, which confirmed this information. Since then, the price of the LINK token has risen from $1.19 to $1.93.
On June 26, Chainlink announced that the token was listed by Coinbase, after which the price of the token rose to $2.24. On June 28, the pummeling began: several addresses bought large amounts of LINK on Binance, then transferred them through a series of dummy addresses. By June 29, the price of LINK had risen to $4.45. According to observers, the daily trading volumes of ChainLink on the Binance exchange at the end of June were artificially inflated. So, at a capitalization of just $1.4 billion, the figure was $863 million. The chart of price movements over the period mentioned, according to some, looked unnatural, especially considering that one of the green candles recorded volumes in favor of sales. There was a possibility that the unknowns wanted to provoke the FOMO, but failed to achieve their goal.
On July 2, the dump phase began: addresses who had previously purchased tokens began dumping them, having previously run them through a chain of dummy addresses. One of the addresses alone sold 4.2 million LINK tokens between July 2 and July 15. On the first day of the “dump,” July 2, the value of the token dropped to the $3.73 mark.
On July 6, the project’s Twitter page published a recruitment message, which, according to some observers, indicated a dump. Following that message, a chart circulated on social media showing estimated token sales of 700,000 LINK each bounce in price after peaking in late June. Passing through a small chain of addresses, these tokens were sold on Binance. Some speculated that the announcement of the expansion was just an attempt to hide the massive liquidation of the tokens.
By July 15, LINK was already worth $2.79, after which the collapse continued. As of September 16, LINK was worth $1.61: the price was almost back to mid-June levels.
On February 6, 2018, the price of the little-known E-Coin token (ECN) rose from $6 to $290 in a few hours – a 4,700% increase. The cryptocurrency’s capitalization reached $1.5 billion. The token entered the top 20 on CoinMarketCap. After that, within a day, the price dropped six times to $45.
Then there was a new round of ECN growth to $228 (400%). The next dump lowered the price down to $5. Then the price grew again from $5 to $65 (1200%). At the time of these events the project did not even have a working site.