Pump and Dump
Basic Information
Pump and Dump is a type of investment fraud in which holders of a currency or stock start to spread positive propaganda based on false information about the asset they hold, with the goal of increasing demand. This then creates an increase (Pump) in the price, before they then sell off en masse (Dump) to make profit.
After the dump, the product falls rapidly to a very low price, and all the investors that believed the false information lose their money.
There have been many major pump and dump schemes in the past in the regulated market, like the one created by the energy company Enron, or the case of Langbar International.
PROs
- The scam affects speculators, which helps to reduce speculation in general
CONs
- It damages the reputation of products within the same category
- It affects the most uninformed and most subjective people in particular
Conclusion
Pumps and dump schemes will always happen, not only on unregulated markets like the cryptocurrency market, but also within the regulated financial world. This is simply because regulations do not prevent scams, and in most cases, they do not find or punish the perpetrators either.
The best way to avoid losing money in a pump and dump is simple: Do not speculate. Investing should be taken seriously, not played like a lottery game. Investors should buy something that they want to hold because it has value, not something they want to sell to make profit.
The decision to buy or not should be taken regardless of price fluctuations and other people's hype. The only thing that matters is the value that the buyer thinks the currency has.
Investors should not worry about pump and dumps as long as they hold something that they think has value. If a cryptocurrency does have real value because it can be used as a payment mechanism and / or a store of value, it will never lose its real market price. Rather, it will only be artificially increased because of speculation, only to fall back to its original price afterwards. Even so, it will not fall below the value that holders, or more accurately, users, originally gave to it.
More specifically, in the case of a cryptocurrency, if investors think they don't have enough knowledge and want to follow other people to see if the asset is valuable or not, they should only be looking for one thing: if the currency is being used as a payment method or not. This is because, as stated earlier, actions speak louder than words. The real value of a cryptocurrency is its capacity to function as a payment method and a store of value, while avoiding the lack of privacy and human control of fiat, government-controlled currencies.
Analyst opinion
When talking about pump and dump schemes, the most important thing for many people is to understand how to tell if the hype is real.
The answer is simple. It doesn't matter. Hype should not be a reason to buy a cryptocurrency. Do your own research and make your own decisions.
The truth is that it is very hard to detect a pump and dump, especially when people unintentionally participate in the scam by repeating the lies that the pumpers started spreading. The smartest thing to do is to avoid speculation, resist FOMO and not blindly follow generalized hype.
The best protection against misleading information is investigation. This means understanding the asset, project or currency that is receiving all the positive comments, and forming a personal opinion about its value.
Investors should never buy on hype, because even if it is real and not a scam, the price will fall afterwards, and investors will just be buying an overpriced product. The reason there is always a fall or adjustment in price after a major increase is because a large number of investors are speculators who only care about buying and selling for profit. In other words, even if the hype is based on real information, some of the increased demand is not real; it is just a consequence of speculation.
Also, it is important to understand that even for speculators, if they are buying during the hype, it is probably too late, and they are just buying the “dump.” Ultimately, this is of no concern to the scammers, who have already sold and profited.
Regarding cryptocurrencies, pumps and dump schemes are most common with new and small-cap coins, so it is smart to be cautious about entering these projects because of hype. Only buy currencies after spending time investigating the currency itself, and also paying attention to the use of the currency among people in general. Pay attention to their actions, not their words. The fact that people are using a currency as a payment method is a better indicator than there just being positive hype.
Analyst
