How does a cryptocurrency pump and dump work
In general, this is a scheme that attempts to raise the price of stocks using recommendations based on false, misleading or highly exaggerated statements. The performers of this scheme already have an established position in the company’s shares and sell their positions after the advertisement has led to a price increase. This practice is illegal under the Securities Act and can result in large fines in countries with tight regulation.
The crypto pump and dump work by convincing naive investors that they are given the opportunity to get rich quick. Fear of missing out is a powerful incentive, and in many cases people convince themselves that this is a real investment opportunity.
The “Group of Investors” competently processes traders outside their community that they have just revealed their “secret” on how to purchase and raise the price of a certain cryptocurrency asset. This is usually an asset with extremely small market capitalization because it facilitates price control and manipulation.
Naive investors buy shares and unwittingly create a facade of legitimacy. This may encourage even more people to believe in fraud and buy even more stocks. As soon as the pump caused a sharp increase in the cost of tokens, the original Pump group sells its digital currency in a coordinated movement, transferring its token reserves to new, unsuspecting investors.
This massive sale leads to a drop in the value of the token – to dump. Then the manipulators leave with huge profits, leaving those who are not in their group, with relatively (or completely) useless assets that they acquired at a very high price.
How to keep your assets
The Securities and Exchange Commission issued a series of tips for investors to avoid losing finance on fraudulent stocks:
- Investors should conduct their own analysis in the investment process. They can also use the services of a financial planner, investment companies, etc.
- False appeals regarding investments can be identified by their emphasis on greater returns and zero or minimal risk.
- Investors should always look for the source from which “hot tips” are offered. Most often, this leads to the discovery of reliable information.
- Most of these methods target stocks of small or medium-sized companies. Another goal is to trade stocks in OTC markets. This poses a greater risk for investors to be cheated, but careful research can reduce the likelihood of risk.
- Always read and base any of your investment decisions on official company reports.
Always remember this investment saying: ‘If it is too good to be true, it probably is.’ If someone you don’t know gives you stock advice, stop and think about why he so wanted to give you such “important” information. Do not expect that you will be able to get a large and quick return on investment, because it is unlikely to happen, so always make plans for the long term. It is also important that you conduct your own research on any investment. This should help you avoid fraud in the case of P&D.