Pump and dump scandals are one of the oldest forms of market fraud (think Wovles of Wallstreet), quickly pumping the value of a mediocre asset, to then sell it at an increased price. It’s persistence has landed it in the constantly expanding world of cryptocurrency. With blockchain technology, the digital era is creating the opportunity for the not so ethical to take advantage of even the most savvy investor.

Pump and Dump — The Inner Workings

The artificial inflation of well planned out pump and dump is a marketing masterpiece, if laid out accordingly. Usually driven by an influx of social media posts consisting of falsified information and inaccurate hype. This is to gain the attention of investors to garner a possible buy in. This is FOMO at it’s very best!

In support of the hype, once investors see this mediocre asset rapidly gaining value, they start jumping in on the bandwagon, as more and more investors start to buy up shares of the stock.

After the pump has inflated, those whom were in on the scheme from the very beginning, will dump the shares of the overpriced asset. These shares are sold by investors at a peak for much higher than it’s worth. Once the sold asset takes a nose dive, and corrects to a more accurate value.

Nurturing the pump and dump

What did people do before the internet in order for pump and dumps to execute? Well it started off the old fashioned way, word of mouth, snail mail, and boiler rooms. Outbound call centers were also used excessively with penny stocks (another reference to Wolf on Wall Street).

Fast forward to the internet today, which is a breeding ground for just this type of scheme. Pump and dump setups are equipped with endless chat rooms, groups, and messaging apps. This makes it an easy organization for a quick hit and monetary gain, provoking even the most savvy investor.

CTFC Fair Warning

First warning to the public, from the CTFC. This is an advisory letter on the pump and dump scheme- http://www.cftc.gov/idc/groups/public/@customerprotection/documents/file/customeradvisory_pumpdump0218.pdf

The Commodities Futures Trading Commision warns of investors being aware of the pump and dump schemes, and how even the most seasoned investor can fall prey to the draw of these pump and dumps.

These scams, the CFTC explained, are not new, but they often take advantage of the hype surrounding breakthrough technologies.

“As with many online frauds, this type of scam is not new — it simply deploys an emerging technology to capitalize on public interest in digital assets,” said CFTC Director of Public Affairs Erica Elliott Richardson. “Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online.”

Cryptocurrency is coming into its own, and is making it’s footprint known. It’s here to stay and ready to play, merging with brick and mortar banking systems. Though it is still in it’s beginning stages of trial and error, it is still widely open to manipulative schemes.