Pump and Dump Scheme

A pump and dump scheme is a common scam and form of securities fraud involving the artificial manipulation of stock prices.

More specifically, this involves the inflation of a stock price by purposely deploying false and misleading information or statements.

Scammers target specific investors in this way with the hope of eventually selling these securities at a higher price.

Pump and dump scams are not new to markets and investors should actively be on the lookout for these threats.

Most commonly, these scams affect lower cap stocks such as penny stocks, though increasingly pump and dump scams have been migrating to the crypto space given high volatility and less oversight.

How do Pump and Dump Scams Work?

The best way to defend against a scam is to understand how it works.

Pump and dump scams represent a group of individual or investors that will buy large amounts of a specific asset for a low price simultaneously, causing the price to rise.

Pump and dump schemes are orchestrated by a group of organizers, often by promoting a certain asset through social media or other messaging platforms.

Often, scammers will coordinate which asset or exchange to target with the aim of driving up volume over a short period of time.

This rapid growth of an asset’s nominal value, usually involving a low market cap asset, will prompt unknowing traders to follow.

Without even knowing, investors are helping feed this trend by purchasing the asset in hopes of riding the momentum.

However, upon attracting additional investment, the original buyers then sell off the assets to turn a quick profit.

This sudden shift in supply and demand results in significant losses, especially for later entrants into the asset.