A pump and dump is a scheme that involves boosting the price of an asset through false information. When the price has gone up a significant amount (“pumped”), the perpetrators sell (“dump”) their cheaply bought bags at a much higher price.
Typical price pattern of a pump and dump scheme.
Pump and dump schemes are rampant in the cryptocurrency markets, especially in bull markets. During these times, many inexperienced investors enter the market, and they are easier to take advantage of. This type of fraud is most common with small market cap cryptocurrencies, as their prices are generally easier to inflate due to the low liquidity of these markets.
Pump and dump schemes are often orchestrated by private “pump and dump groups” that promise easy returns for joiners (usually in exchange for a fee). However, what usually happens is that those joiners are taken advantage of by an even smaller group who have already built their positions.
In the legacy markets, people found guilty of facilitating pump and dump schemes are subject to hefty fines.