Introduction to Pump and Dump Scheme

When it comes to trading and investment, the pump and dump scheme is clearly one of the most frequently used phrases.  According to its definition, pump and dump is a manipulative technique to increase the price of a certain stock by using false information and recommendations based on hyperbolic and inaccurate statements. Traders following this scheme can successfully manoeuvre the prices of their stocks by creating false hypes and sell them at a considerably higher price. To an untrained eye, the rise and fall of the price of a particular stock might seem capricious or heavily dependent on the psychology of the traders across the globe. But if someone can grasp the nuances of this scheme, this drastic change in price would not seem so random.

Nowadays, virtual currency or cryptocurrencies are making a huge impact on the global economy. As a result, billions of traders around the world now rely on a large number of cryptocurrencies and quite naturally the scheme of pump and dump is gradually becoming popular to the cryptocurrency traders as well.

Since the inception of bitcoin in 2009, a considerable number of cryptocurrencies came to the market and the process is still continuing. Almost every month an ICO (Initial Coin Offering) is transforming into a new cryptocurrency. Hence, a market that started with only one digital coin now has nearly 1800 cryptocurrencies. Unfortunately, not all of these coins are equally successful in the market as Bitcoin, Ethereum, Litecoin, Ripple, and Monero still dominate the lion’s share of this market.

The coins that are not traded very often by the investors but possess a significant market cap are popularly known as “shitcoins”. The experts of pump and dump technique generally target these coins as their prices can be easily manipulated.

Pump and Dump schemes are rampant in the crypto-market presently and government-related stock markets like London and New York’s exchanges have declared it to be illegal. “It’s clear from even casual monitoring of the exchanges that this sort of activity is rife, particularly with altcoins with smaller circulation,” says Ben Yates, a senior associate at the law firm RPC, known for closely overseeing the crypto industry. Here, a few aspects of this organised market manipulation process will be discussed.

pump and dump

Schematic Breakdown Of Pump And Dump

Traditionally, this process was conducted through cold calling. But with the advancement of technology and the ubiquity of internet connection all across the globe, carrying out this scheme has become even easier nowadays. Now all an investor has to do is to target a cryptocurrency with a lower market cap or with a lower circulation and to increase its price through exaggerated and inaccurate statements. The advantage with the coins with a lower market cap is that they do not require too many buyers to push its price higher than it actually is.

As almost everyone possesses an account on a social networking site, these hypes can be created using Twitter and various other sites.

The Methodology Of Pump And Dump

The methodology of this scheme is replicable and consists of a few distinct steps. Traders usually need some footwork before getting fully prepared for this process. The steps remain more or less the same for every pump and dump process:

Step 1: Accumulation

The accumulation phase majorly deals with building up a suitable position. It is actually the most important step of conducting any pump and dump scheme. Experienced pumpers generally conceal their activities during this phase so that the price remains unchanged until the process gets finally started. The key to remaining unnoticed during this step is to open up a significant number of minuscule micro buys instead of one major purchase. In this way, the traders can successfully create their position over time without causing major spikes on the cryptocurrency chart. In case of digital currencies with very low market caps, even the small spikes on the chart might seem conspicuous. Hence, it is more propitious to rely on “shitcoins” with higher market caps rather than genuinely smaller coins. Besides this, investors also create fake buy/sell walls to repress the price from growing early. To sum up, the step of accumulation is all about putting up an inordinate number of sell orders, so that the order book seems like that the dumping would commence at any moment. In consequence, many traders start selling their cryptocurrency possessions in the fear of losing money.

Step 2: The Demo Pump

Before the real pumping commences, this phase is all about preparation. The number of demo pumps or test pumps can be more than one under certain circumstances. Investors rely on this step to get a clear idea about the current market scenario and to ensure complete control over the trading. The demo pumps are used to detect whether there is any resistance along with the overall sentiment of the market. During this phase, experienced traders also dump the price of a selected cryptocurrency a few times so that the weak hands in the trading get shook off beforehand.

Step 3: The Actual Pumping And The Shakeout

When the actual pumping begins, the traders can become very aggressive during this phase as the weak hands in the trading get shook off and the price of a certain cryptocurrency skyrockets. This step can elevate an all-time low price of a certain cryptocurrency to an all-time high figure. During this drastic change of price, the traders who are unaware of this scheme, usually sell their cryptocurrencies and get eliminated from the trading process.

Step 4: The Dump

It is the final step of pump and dump process. Investors using this scheme tend to use multiple strategies while dumping a certain cryptocurrency. The main objective of this step is to secure a considerable amount of profit from other investors who are buying from the top of the candle chart to cope up with the pump initiated previously. During this phase, the pumpers either set up micro sells along the pumped candle or they dump into a suitable buy wall. A significant number of pump and dump traders have a more sophisticated modus operandi where they can buy into their own walls repeatedly to generate more FOMO (Fear Of Missing Out) among other traders. In this process, when others start buying, these pump and dump traders buy into their own setup walls and exit the pump slowly but steadily.

The Operation Of Pump And Dump On Telegram

Nowadays, most of the pump and dump groups operate on Telegram. The process of pump and dump is majorly conducted by the admins of these groups who try to collaborate with other Telegram groups in order to widen their audience and eventually to make a considerable impact when the actual pump and dump occurs. These groups use certain trading signals for effective communication as well as to determine an appropriate time for pumping and dumping.

The operation on Telegram by several groups is conducted through multiple phases. They are:

  1. Selecting an appropriate shitcoin: Several Telegram groups that are associated with pumping and dumping look for a suitable shitcoin with a significant market cap and other necessary qualities to be eligible for pump and dump. Once such a coin is found, the groups analyse it to determine whether it is the easiest one to manipulate or not. After that, these groups conduct an internal vote to make their final decision. Usually, these groups choose those cryptocurrencies that cannot be found within the list of top 75 cryptocurrencies on the Coinmarketcap.
  2. Buying Small Stacks: Traders going for Pump and Dump Schemes usually aim to buy coins in small stacks, usually with a maximum of 0.2 BTC or less. This is done so that the selected coin does not look “pre-pumped” to mainstream traders. The next step is to monitor free telegram channels to look out for bot services who announce Pump and Hodl Signals. The tell-tale signs of a pump and hodl program about to begin are when a message is posted asking traders to log in to their Bittrex or any other exchange account. This should trigger the traders behind the pump and dump scheme, who have by this time, amassed a considerable amount of money. The paid members are then allowed to fill their bags. This results in the free channel user requiring paying the profits of others.
  3. Spreading the Signal: The final step involves the co-operating channel admins who now spread the signal to their members and in turn get the opportunity to participate and acquire another high amount. After the signals have been finally posted in all of those signal groups, the pump signal will be posted in those channels. Generally, traders target channels with impressive member counts where the final signal group members acquire the shitcoin in huge numbers. This results in an increase in the short term price, and will continue to grow till a certain percentage is reached. This percentage is almost always set by the pumpers beforehand who then begin the Dump process when the target percentage is reached. With this, completes the entire process of organising and executing a pump and dump scheme by using telegram.

pump and dump scheme


How To Identify Pump And Dump Groups On Telegram

For a novice or unsuspecting trader, it can be quite demoralising and damaging to be a victim of a pump and dump scheme. The number one sign that a pump and dump is about to be conducted on a particular channel is when the group admin calls for everybody to log in to their exchange accounts. It is thus advised for traders to simply unsubscribe the channel to prevent a massive loss of funds. It should also be noted that most free channels will make an unsuspecting trader the scapegoat without them not realising till the last moment. Alternatively, there are some free channels that not only offer a paid channel service but also give a fraction of their signals with a slight delay for free. This is also another technique of enticing traders with cross-promotion advertisements to get into the cycle of another Pump and Dump group.  Below is a compilation of tell-tale signs that can help an individual identify a Pump and Dump channel beforehand.

  1. Published Signals for lesser known or new Tokens should be a clear indicator.
  2. Most Pump and Dump groups use a timer for the next signal. Examples: “next signal in 60 minutes” or “Log in Now”.
  3. Charts that are associated with these groups normally show many tiny candle graphs, usually followed by a big candle after which traders are asked to buy into that candle.
  4. The Members, sometimes, post irrelevant or unimportant news for the shitcoin as a part of the practice.
  5. The unsuspecting traders are sometimes pushed hard to hold that coin no matter what the circumstance. This is done to make sure that the pump’s sell orders get filled.
  6. Traders not part of the scheme are also pushed to spread the news on various social media platforms.
  7. Identical Signals can be found spread across many similar looking channels
  8. A complete absence of any technical analysis for the shitcoin as compared to a normal instance.

If one or more of the above signs are noticed by an outside trader, it is advised to leave the channel immediately before getting sucked into the pump and dump scheme.

Earning From Pump and Dump Schemes Without Directly Participating

Even though there are many automated “bot” programs which scour the markets and do automated volume checks to notify traders, it is generally agreed that a manual scan is the best method. Although manual scanning requires a lot of understanding and can be risky in certain situations, it can be a lucrative and profitable way to earn money without participating in a scheme.

Pump and Dump groups have a strict and pre-determined methodology that they follow, including how they select the particular “shitcoin”. The trick here is to find out what the selected coins will be before the whole group knows it themselves. Traders who want to enter the group using this method are advised to go very small in the beginning. A lot of patience is also required to wait for the exact moment when the scheme starts.

The Role Of Influencers In A Pump And Dump Scheme And Their Significance

Social media influencers who have a huge fan following and marketing influence sometimes play a key role in pump and dump schemes behind the scenes.  There are also several sites dedicated to influencers who are looking to spread the word, such as Tomoson or Meltwater who link brands with these influencers for profitability. This practice is highly controversial and considered unethical by many in the crypto-world. There are a number of prominent market influencers who have been in the news lately for fooling unsuspecting traders by being involved in such an unfair practice. Below are the key indicators that can help traders to identify influencers in a pump and dump scheme.

  1. Tweets: Influencers and experienced cryptocurrencies often give tips and advice for other newcomers to profit from. This can include which coins to buy and when, along with other related information. However, in certain cases, influencers can just shill a particular coin and sit back as other unsuspecting traders pile up losses. One such key figure was John McAfee, a maverick programmer and crypto enthusiast with a number of followers. He profited from certain coins by picking up their values and dropping them which resulted in a huge loss of funds for a lot of traders. He used Tweets to influence other traders into buying and holding a particular coin, as shown below.

pump and dump scheme influencers

  1. Other Social Media Platform: Normally Social media influencers like celebrities and key investors are meant to disclose when they’re paired to promote a particular product or service or in this case, a particular Cryptocurrency. Many Influencers have been in the news for failing to do so, in some cases even profiting with a share of the coins or tokens.

Final Thoughts

The world of crypto is very volatile and unpredictable, with pump and dump schemes being most dangerous if not used correctly. It is formulated and aimed at the inner circle who ultimately executes it. Many groups offer early access to such pumps but are often risky as they don’t work out eventually.  Hence, pump and dumps are considered a kind of trap to the unsuspecting trader.  No amount of technical or fundamental analysis can shield a trader from a pump and dump execution if they fall for it; therefore it is always advised to stay away from such low volume, rare, lesser known or unimportant coins, as they tend to dry up in value once the scheme has been executed. One thing all traders should realise, however, is that no free services that promise instant success and immense fortunes exist, and they almost always turn out to be elaborate pump and dump schemes.

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