And the first thing you need to know about it – it’s a fraud! It originated on the stock exchange market way back when the Netherlands was an Empire and the financial market we know today was just evolving. Maybe you have heard of the South sea bubble in Amsterdam that occurred way in the 1720. So let me try to explain to you what is pumping and dumping in simple words? It is a scheme used by a group of people, who buy stocks at a very low price and then artificially spread the word that this stock is raising or will rise in price significantly. Such optimistic and definitely misleading messages are widely spread in order to make more and more people buy the stock, naturally leading it to rise in price on the market. And that’s “when to pump and dump”: sell the stock for a high price thus gaining profit. In the result the stock dramatically goes down in price and while the fraudsters win, the other people, who invested in the scheme, lose money. Such fluctuations are obviously bad for the economy of specific sectors!
Is the pumping and dumping legal?
In fact, historically every time price bubbles appeared on the market the “pump and dump” schemes flourished too. Before the markets where generally unregulated, companies and individuals have practiced this form of financial manipulation. But at the end of the 90s most developed countries have brought up strict legislation laws to regulate the stock markets. In the U.S., for example, the Securities and Exchange commission enforced to strictly prohibit any “pump and dump” schemes with penny stocks.
Yet again here and there the pumping and dumping schemes help fraudsters prosper on a global level. One of the most scandalous examples is the Enron’s case! One of America’s leading companies has launched a false campaign using Yahoo messages providing misleading information on its profits. While in fact, the company was going bankrupt. As a result of this “pump and dump” scheme Enron’s stocks got hugely overvalued and the company’s management gained illegal profits.
How does it work in the crypto sector?
Since the cryptocurrency business and stocks are still unregulated in most of the countries, frauds of all types from ICO scams to phishing and hacking easily occur here and there. Fake news often goes viral in the cryptocurrency world and that affects the whole fintech sector. One may ask, but what is pumping and dumping in the cryptocurrency industry and how does it differ anyhow from the classic stock fraud? Basically, it’s the same old pumping and dumping, but with a new twist. The cryptocurrency exchange rates are constantly turbulent, the messages on new currencies, new ICO’s and new bitcoin wallets spread like fire on various forums, through social networks and chat messengers. It’s barely possible to distinguish fake “pump and dump” news from credible market messages.
Moreover, users and ICO participants create groups in social networks and coordinate buying and selling cryptocurrency thus regulating its price. For example, someone creates a group in Telegram or Wechat, artificially getting users signed up. The group gets a significant number of users: 60 or 70 thousand people. The “pump and dump” scheme begins. All the participants agree on buying a coin, which rises in price. And that is one huge investment in a coin when 60 thousand people buy it at a time. News spread quickly in the cryptocurrency community and hundreds of inexperienced investors hurry to buy the new miraculous coin. And the price of the coin grows higher and higher. Participants of the group wait for a command: when to “pump and dump”. But obviously, they can never tell, if the coordinators of the group will ever inform them or just start the pumping and dumping process by themselves before it gets too late.