Pump-and-Dump Key Points
- Pump-and-dump is a fraudulent practice prevalent in the cryptocurrency and stock markets.
- This scheme involves artificially inflating the price of an asset to attract investors.
- Once the price is high enough, the scammers sell off their holdings, leading to a price crash.
- Investors who bought the asset at the inflated price suffer significant losses.
- Regulatory bodies, like the SEC in the US, consider pump-and-dump schemes illegal.
Pump-and-Dump Definition
A pump-and-dump is a fraudulent trading scheme where the price of an asset, often a low-market-cap cryptocurrency or stock, is artificially inflated (“pumped”) to attract unsuspecting investors. Once the price reaches a high level, the fraudsters then sell off (“dump”) their holdings, causing the asset’s price to plummet and leaving the investors with significant losses.
What is Pump-and-Dump?
Pump-and-dump is an illegal market manipulation strategy used by fraudsters to profit at the expense of innocent investors. It involves artificially inflating the price of an asset, often a lesser-known cryptocurrency or a low-priced stock, through false or misleading statements.
The misleading information creates a buying frenzy among investors, causing the asset’s price to skyrocket.
Once the price is sufficiently high, the fraudsters then sell their holdings in the asset, making a significant profit.
This sudden sale leads to a drastic drop in the asset’s price, causing massive losses for the investors who bought at the inflated price.
Who Does Pump-and-Dump Affect?
Pump-and-dump schemes primarily affect unsuspecting investors who get drawn into the buying frenzy due to the artificially inflated prices. These investors often suffer significant losses when the asset’s price crashes.
The fraudsters who initiate the scheme benefit by selling their holdings at the inflated prices.
Pump-and-dump schemes also negatively impact the overall market integrity and can erode investor trust in the trading system.
When Does Pump-and-Dump Occur?
Pump-and-dump schemes can happen anytime, but they are more common during periods of high market volatility. They are often seen in less regulated markets, such as the cryptocurrency market, or in the stock market’s over-the-counter (OTC) trading, where regulatory oversight is less stringent.
Where Does Pump-and-Dump Happen?
Pump-and-dump schemes can occur in any trading market, but they are particularly prevalent in the cryptocurrency market due to its relative lack of regulation. They are also common in the stock market, particularly in the over-the-counter (OTC) trading of low-priced, thinly-traded stocks.
Why Does Pump-and-Dump Happen?
Pump-and-dump schemes are driven by fraudsters seeking to make a quick profit at the expense of other investors. They leverage the lack of oversight and regulation in certain markets, along with the relative anonymity provided by online trading platforms, to carry out their fraudulent activities.
How Does Pump-and-Dump Work?
Pump-and-dump schemes typically start with fraudsters buying large quantities of a low-priced asset. They then disseminate false or misleading information about the asset to create a buying frenzy among investors. This artificially increases the asset’s price.
Once the price is sufficiently inflated, the fraudsters sell off their holdings, causing the asset’s price to crash. The unsuspecting investors who bought into the inflated prices are then left with significant losses.