arrow left facebook twitter linkedin medium menu play circle

Digital Fraud Wiki

Your source for the latest fraud intelligence, insights, research, and commentary.

Pump and Dump: The Crypto Scheme of Imagined Value

What are pump and dump schemes?

Pump and dump schemes are coordinated fraud attacks where scammers use misleading or fake information to inflate an asset’s price. At the outset, the scammers have the largest position in the targeted asset. They get their assets at a very low price, then create inflated hype around the asset to drive up demand. Fraudsters spread positive rumors, push aggressive marketing campaigns, and lean heavily on social media to attract investors.

Fraudsters keep this up until they’ve “pumped” the price of the asset up enough for them to cash out with huge returns. Next, they sell off or “dump” all their holdings, causing the price to plummet. The sudden sell-off means unsuspecting investors get stuck with devalued or worthless assets.

How do pump and dump scams work in cryptocurrency?

Pump and dump scams in cryptocurrency operate similarly to those in traditional markets but leverage the unique characteristics of the cryptocurrency market. Here’s how they typically work:

  1. Selection of Cryptocurrency: The perpetrators of the pump and dump scheme select a relatively low-volume or low-market-cap cryptocurrency. These cryptocurrencies are often easier to manipulate due to their smaller market size.
  2. Creation of Hype: Using social media platforms, online forums, chat groups, and other channels, the perpetrators disseminate false or misleading information about the selected cryptocurrency. They may tout exaggerated claims about the cryptocurrency’s technology, partnerships, or upcoming developments to generate hype and attract investors.
  3. Coordination: The perpetrators coordinate their efforts to execute the pump. This may involve forming groups or communities dedicated to promoting the targeted cryptocurrency and coordinating the timing of their buy orders.
  4. Pump Phase: During this phase, the perpetrators begin buying large quantities of the targeted cryptocurrency, driving up its price. As the price rises, unsuspecting investors who see the sudden increase in value may also start buying into the cryptocurrency, further fueling the pump.
  5. Dump Phase: Once the price of the cryptocurrency has been artificially inflated to a desired level, the perpetrators begin selling off their holdings at a significant profit. This mass sell-off causes the price to plummet rapidly, leaving those who bought into the hype with losses.
  6. Exit: After the dump phase, the perpetrators may move on to another cryptocurrency to repeat the process, leaving behind the unsuspecting investors who suffered losses.

Pump and dump scams in cryptocurrency markets are facilitated by the relatively low liquidity and lack of regulation compared to traditional financial markets. However, regulatory authorities are increasingly cracking down on such schemes, and investors are advised to exercise caution and conduct thorough research before investing in any cryptocurrency.

Are pump and dump schemes illegal?

Pump and dump schemes are illegal and are considered a form of securities fraud under securities laws in many jurisdictions. They can cause significant financial losses for investors and can undermine the integrity of financial markets. Regulatory authorities actively monitor and investigate suspicious trading activity to identify and prosecute those involved in pump and dump schemes.

Are crypto pump and dump schemes illegal?

Traditional market-based pump and dump schemes are illegal and classed as a form of securities fraud. But because crypto markets have much less regulation, the legality of crypto pump and dump schemes isn’t as clear.

Authorities struggle to prosecute crypto pump and dump scammers because crypto transactions are decentralized and often anonymous. On top of that, there is little regulation drafted to specifically address crypto fraud claims.

Regulatory authorities around the world are increasingly focusing on combating crypto frauds like pump and dumps. Right now, while crypto pump and dumps are highly unethical, they often don’t land perpetrators behind bars.

How to spot a pump and dump crypto scam

Know the red flags to watch out for that signal a pump and dump scheme, including:

  1. Sudden price spikes without any fundamental reasons like major announcements, developments, or partnerships.
  2. Unsubstantiated hype with grandiose claims, promises of guaranteed returns, or overly optimistic projections.
  3. Low trading volume cryptocurrencies suddenly shooting up in investment.
  4. Groups or communities dedicated to promoting specific cryptocurrencies and coordinating buying activities.
  5. Individuals claiming to have insider information or exclusive insights about a cryptocurrency’s price movement.
  6. Promoters using high-pressure tactics like fear of missing out (FOMO) or promises of quick profits.
  7. Lack of transparency on the identity of the promoters, the underlying fundamentals of the cryptocurrency, and the motives behind the hype.
  8. Associated projects with patterns of sudden price spikes followed by rapid declines.

Be vigilant, conduct thorough research, and approach crypto investments with skepticism.

How to avoid pump and dump crypto scams

Do your own research

Conduct thorough research before investing in any cryptocurrency. Look into the project’s whitepaper, team members, technology, roadmap, and community support. Genuine investment opportunities are based on solid fundamentals, not hype.

Be skeptical of hype

Be cautious of cryptocurrencies being hyped up with promises of guaranteed returns or exaggerated claims. If an investment opportunity sounds too good to be true, it probably is.

Verify information

Verify information from multiple credible sources before making investment decisions. Avoid relying solely on social media posts, online forums, or chat groups, as these channels can be manipulated by scammers.

Understand market dynamics

Familiarize yourself with market dynamics and recognize the signs of a pump and dump scheme, such as sudden price spikes, low trading volume, and coordinated buying activities.

Avoid high-pressure tactics

Don’t succumb to high-pressure tactics used by promoters of pump and dump schemes, such as fear of missing out (FOMO) or promises of quick profits. Take your time to assess investment opportunities calmly and rationally.

Use trusted platforms

Trade cryptocurrencies on reputable and regulated exchanges that have robust security measures in place. Avoid unregulated or obscure exchanges that may facilitate pump and dump activities.

Diversify your portfolio

Diversification is key to mitigating risk in any investment portfolio. Invest in a variety of cryptocurrencies with strong fundamentals to spread risk and reduce exposure to potential scams.

Stay informed

Stay informed about regulatory developments, market trends, and potential scams in the cryptocurrency space. Follow reputable news sources, blogs, and industry experts to stay updated on the latest developments.

Trust your instincts

Trust your instincts and intuition when evaluating investment opportunities. If something doesn’t feel right or if you’re unsure about an investment, it’s better to err on the side of caution and refrain from investing.

Seek professional advice

Consider seeking advice from financial advisors or investment professionals who specialize in cryptocurrencies. They can provide valuable insights and guidance to help you navigate the complex and often volatile cryptocurrency market.

How AI helps detect pump and dump scams

  • Real-time monitoring – by analyzing large volumes of trading data, AI fraud platforms can reveal patterns noting possible pump and dump schemes. This includes abnormal trading volumes, sudden price spikes followed by sharp declines, and coordinated buying activities across multiple accounts.
  • Network analysis – AI platforms can analyze the network of transactions and interactions within cryptocurrency ecosystems to identify connections between individuals or groups involved in pump and dump schemes. This includes tracking wallet addresses, transaction histories, and behavioral patterns to uncover fraudulent activities.
  • Anomaly detectionmachine learning techniques help detect anomalies in cryptocurrency markets that may indicate pump and dump schemes. This includes deviations from historical trading patterns, abnormal price movements, and sudden changes in liquidity.
  • Adaptive learning – tools like Generative AI and adaptive machine learning can continuously adapt to evolving tactics they observe in customer activity. This includes updating detection models based on new data and feedback to enhance accuracy and effectiveness over time.
  • Learn more about crypto scams to watch out for in our crypto scams deep dive. If you’re looking for a fraud prevention platform to catch pump and dumps and other types of crypto scams, book a time to chat with DataVisor about how we can help.