A “Pump and Dump” scheme is a form of fraud that has existed for years in traditional securities markets, and it has also found its way into the cryptocurrency market.
In a pump and dump scheme, organizers manipulate the price of a cryptocurrency, often a low-volume one, by promoting it and creating a buzz around it to attract buyers — this is the ‘pump’. They use various means like social media platforms, chat groups, or even spam emails to spread hype and misinformation about the token. This pumps up the price artificially through a surge in short-term demand.
Once the price has been pumped and reaches a certain point, these organizers quickly sell off their holdings in it — this is the ‘dump’. The price then typically crashes, leaving those who bought in late during the pump phase with significant losses.
These schemes are typically illegal in traditional securities markets due to their fraudulent nature. However, because the cryptocurrency market is decentralized and less regulated, these schemes have unfortunately become common, and they can be much harder to prevent or punish. This is why it’s essential to do careful research and avoid making investment decisions based solely on hype or the promise of quick profits.