Cryptocurrency Pump and Dump: What Is It and How to Avoid It?

What Is Pump and Dump in Cryptocurrency? 

Simply put, Pump and Dump is a scheme where a group of people intentionally “inflates” the price of a crypto asset and then abruptly collapses it to make money. 

 Pump-and-dump manipulations are not new. They were used back in the XVII century, when the South Seas Company in Great Britain inflated the price of its shares, promising huge profits to investors. People bought up assets en masse, driving up their prices. When the excitement reached its peak, the organizers of the scheme sold their shares, crashing the market, and thousands of investors suffered financial losses. Later, dump and pump was actively used in the stock markets and then spread to the cryptosphere.  

How Does the Pump/Dump Scheme Work on the Exchange? 

First, let’s find out what a pump is and how it is realized. This is an artificial overvaluation of cryptocurrency, which creates the illusion of its rapid growth. Let’s consider the three stages of the scheme: 

• Preparation. Organizers begin to buy up a little-known asset in small volumes. At the same time, a marketing campaign is launched: “hot insights” are published on social networks, buy signals appear in Telegram chats, and bloggers predict the rapid growth of the token. 

• Pump. In crypto, it is the process of active acquisition of cryptocurrency by organizers, which creates the illusion of excitement. Observing the price growth, gullible traders also begin to buy tokens, hoping for an easy profit. The value of the asset can increase many times over. 

• Dump. A sharp collapse in the cryptocurrency price occurs after it is no longer pumped. This happens after reaching the peak price — organizers begin to sell assets en masse, fixing profits. The market becomes oversaturated with tokens, demand falls, and the price drops rapidly. Investors who bought the asset at the peak stay on the downside: they either have to sell the tokens at a loss or wait (most often in vain) for new growth. 

 To make the scheme look less suspicious, two or more waves of pump can be launched, but the outcome is always the same — collapse.

Cryptocurrency pump is increasingly organized through Telegram channels, where thousands of participants buy tokens “on command,” contributing to its growth. Cryptocurrency exchanges are fighting such schemes using algorithms to track suspicious transactions and AML procedures. 

Signs of Cryptocurrency Pump and Dump 

To protect your capital, you need to know the distinguishing features of the pump-and-dump scheme of digital asset rates. 

How do you know that you are facing a pump? 

Understanding what a pump in crypto is, you will be able to recognize it in the market by the following signs: 

• A sharp rise in price for no apparent reason. If the token’s value begins to increase rapidly, but there is no significant news about the project, this is an alarming signal. 

• Lack of references in reliable media. If a coin shows explosive growth, but major crypto publications and analysts do not write about it, this is probably a manipulation. 

• Hype on social networks and messengers. Reports about the “rocketing rise” of some little-known coin may be part of a prepared scenario. 

• Low popularity of the coin before the pump. If a cryptocurrency was virtually invisible in the market and then its rate rose sharply, it is most likely a planned action. 

• A sharp increase in trading volume. Manipulators artificially accelerate activity to create the impression of a “hot” market. If the trading volume increases dozens of times in a short period, you should be careful. 

How to recognize a dump in cryptocurrency? 

The main signs indicating that a price dump is planned are as follows: 

• A sharp jump in the exchange rate without real reasons — a signal that a cryptocurrency dump may soon follow. 

• Formation of a “pyramidal” chart. The pattern of pump and dump resembles a mountain: rapid growth is replaced by a sharp fall. 

• A surge of activity of large players. If “whales” massively sell an asset after rapid growth, it means that the price will soon collapse. 

Risks of Participating in Pump and Dump 

At first glance, it may seem that the pump-and-dump scheme in crypto is an easy way to make money, but in practice, most participants lose money. Let’s analyze the main risks: 

Late entry 

If you did not enter the transaction at the very beginning of the rate growth and did not manage to exit in time, there is a high probability that the purchase price of the coin will be overvalued. After the dump, the value will collapse sharply, and you will be left with an asset that no one else needs. 

Difficulty of prediction 

Sometimes, the value increases by 50%-100% for little-known tokens and 20%-40% for large coins. However, each situation is unique, and no one but the organizers knows exactly when the dump will start. If you enter too late, you will not have time to sell the asset for a profit. 

Is Pump and Dump in Cryptocurrency Legal? 

The scheme is considered fraudulent in traditional financial markets, but with digital assets, the situation is more complicated. Price rises or falls can occur naturally, and it is difficult to prove collusion, especially because of the anonymity of the participants. In general, financial regulators consider cryptocurrency Pump and Dump to be illegal, but due to the poor market regulation, fighting it is difficult. 

How to Avoid Participating in Pump and Dump? 

To avoid becoming a victim of a fraudulent scheme, you should understand what dump and pump is and be able to distinguish between natural cryptocurrency growth and planned growth. We have prepared tips for you: 

1. Before investing in a coin, make sure it is listed on reliable crypto exchanges and aggregators. Large sites conduct basic verification of projects, which reduces the risk of encountering a scam. 
2. Ask yourself, “Why is this coin growing?” If a company releases an update, enters into a partnership, or attracts a large investment, these are natural reasons for a rate increase. However, if the spike happens spontaneously, it’s a signal of fraud. 
3. Avoid young tokens. If an asset appeared a couple of months ago and is already actively accelerating in price, a Pump and Dump is probably planned. Truly innovative crypto projects take years to develop. 

Varieties of Pump and Dump

Having found out what a pump in cryptocurrency is and how the price dump is carried out, let’s talk about the varieties of these processes:  

• Classic pump and dump. Organizers choose a little-known coin, provoke its growth, and then sell it en masse, causing a collapse in price. 

• Coordinated pump and dump. Participants agree in advance in closed groups to buy and sell the asset, simultaneously accelerating the price. 

• Micropump. Manipulations are carried out with low-liquid assets, where even small amounts can significantly raise the rate. 

• Retail pump. Through social networks and forums, false forecasts are spread so that retail investors start buying up. After the growth, the organizers exit the asset. 

• ICO pump. Scammers conduct an initial token offering promising high returns and then dump the asset. 

Pump and Dump in the History of the Crypto Market 

Manipulations with the price of tokens and coins have repeatedly led to large-scale losses among investors. The most famous cases are: 

E-Coin (2018)  

The coin’s pump caused its price to skyrocket by 4,742% in just one day. The little-known E-Coin moved from the top 500 to the top 20 cryptocurrencies. Organizers pumped the coin twice before finally dropping the price to the minimum, leaving investors with losses. 

Bitcoin Diamond (2018) 

The token was the target of a scheme on the Kucoin exchange, where its price rose 77% in 15 minutes, reaching $4,47, and then quickly fell after organizers sold their holdings. This was an example of a coordinated pump and dump where investors suffered significant losses. 

Squid Game (2021) 

A token inspired by the popular “Squid Game” Netflix series was launched in October 2021. Its price rose from a few cents to $2,856 in a week, peaking in early November 2021. However, the token’s developers soon withdrew $3.38 million, after which the price dropped to zero. This is a classic example of Pump and Dump with elements of Rug Pull (a scheme where developers abandon a project and remove all of its liquidity). 

SaveTheKids (2021)  

The token was promoted by prominent bloggers, promising that a portion of the profits would go to charity. After the launch, insiders sold off assets, dropping the price from $0.005 to $0.00001. 

Santa Floki (2021) 

Tweets by American businessman Elon Musk have repeatedly triggered the pumps of various tokens. For example, after a photo of his puppy in a New Year’s suit, the Santa Floki token (HOHOHO) rose by 5,000% but soon depreciated. 

How to Make Money on the Pump and Dump of Cryptocurrencies? 

When the market pumps, trading can be profitable, but this way of making money requires quick reactions and has many risks. Some investors join closed channels, where they publish information about pumping the price in advance. However, even participation in such groups does not guarantee profit since the organizers can manipulate the order of entry. 

A popular strategy during the crypto pump: 

• Buy tokens at the start. 

• Sell 50% of assets when the price doubles. 

• Sell the rest at the peak or risk waiting for the second wave. 

 The main mistake is greed. If you fail to withdraw your profit in time, you can lose everything. Many traders use HFT bots that instantly buy and sell assets. The faster you enter a trade, the higher the chances of profit.  

How Is Pump and Dump Different from Legitimate Growth? 

The natural growth of cryptocurrency is due to real events: the release of updates, partnerships, listing on major exchanges, etc. Authoritative media write about such projects, the team publishes news, and the trading volume grows gradually. 

We have already found out how the price is pumped up and what a dump in cryptocurrency is:  

• The exchange rate skyrockets for no apparent reason. 
• Information noise is created on social networks and closed chats. 
• Trading volumes increase sharply but then fall drastically.  

Conclusion 

A pump and dump in the crypto market is a manipulation that can lead to serious financial losses for inexperienced investors. The main tool of defense is critical thinking. You should not give in to social media hype, invest in questionable tokens, or hope for easy earnings. Cryptocurrencies can bring profit, but only to those who approach investments consciously. 

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