What are crypto pump-and-dump groups? Are they legal?

Pump-and-dump operations, which fraudulently manipulate prices by disseminating false information, have existed in economic contexts since at least the 1700s. For instance, con artists with shares in the South Sea Company started making false statements about the business and its revenues in the beginning of the eighteenth century. 

The plan was to inflate the stock price artificially before selling it to uninformed consumers misled into thinking they were investing in a promising good. Contemporary con artists are following their example with a pump-and-dump strategy known as the South Sea Bubble.

However, with the advent of blockchain technology and the rise of crypto trading, the issue has become broader and more severe. Because government regulation has lagged, cryptocurrencies are especially susceptible to this kind of market manipulation.

In this article, you will learn what crypto pump-and-dump schemes are, how they work and how to spot them.

What are crypto pump-and-dump groups?

A pump-and-dump scam is a sort of fraud in which the perpetrators amass a commodity over time, inflate its price artificially by disseminating false information (pumping) and then sell what they have accumulated to unwary buyers at a higher price (dumping). Once the perpetrators have fraudulently inflated the price, it usually declines, leaving purchasers who made their decision based on misleading information at a loss.

Self-organized teams of individuals carry out online pump-and-dump operations. These pump-and-dump groups organize the scams in plain sight on the Discord server (voice over internet protocol and text chat service) or Telegram (instant messaging app), making it possible for anybody to join the groups without prior consent.

In pump-and-dumps groups, there is a hierarchy of members and leaders (or admins) who manage the group. Higher ranked members receive the notification that initiates the pump by disclosing the target coin a little earlier than lower ranked users. In this manner, the member has a greater chance of purchasing at a cheaper cost and profiting more from the pump-and-dump scheme.

Most groups are structured using an affiliation system, where members can move up the hierarchy by recruiting new members. The rating rises in proportion to the number of new members added to the group. In contrast, some organizations have a simplified hierarchical structure with just two levels: VIPs and common members. To join these organizations, a user must pay a charge, typically in Bitcoin (BTC), between 0.01 and 0.1 BTC.

What are crypto pump-and-dump signals?

A crypto pump signal is a message intended to entice individuals to purchase a cryptocurrency so they can profit from the price manipulation caused by the sudden uptick in demand. After the pumping causes a significant price hike, which are called crypto dump signals, members start selling at a good profit. There are two types of groups on Telegram and Discord that post signals on unknown crypto coins to inflate the value of the underlying coins artificially, as explained below:

The messages in pump-and-dump crypto groups on Telegram and Discord are usually broadcast in the following ways:

  • Info and How-To: These two sections resemble a message-pinned electronic bulletin board. Each segment is made up of a number of rooms, each of which has only one or a small number of messages. The group’s rules, news about the group, information on the affiliation system and frequently asked questions are typically found in the rooms of the info section. Similarly, you may find the guides to the crypto industry or the best practices for taking part in a pump-and-dump operation in the rooms of the How-To sections.
  • Signal: Only administrators may post in this area, which is its central hub. The pump signal and the trading-signal rooms are often located in this area. The administrators talk about the upcoming pump-and-dump operation in the first room and exchange trading tips in the second.
  • Invite: The server’s bots live in the rooms in this section. Here, users can ask the bots for invite links to attract new members or find out how many people joined the server using their invite links.
  • Discussion: Group members can converse freely in rooms devoted to various themes in this section.

How do crypto pump and dumps work?

The numerous pump-and-dump groups on the internet have varying activity levels. The busiest carry out around one pump-and-dump cycle every day. Less active groups may only carry out one operation a week. Other organizations conduct activities when they think the market conditions are favorable. So, can you make money pumping and dumping crypto?

There may be a chance to benefit because a pump-and-dump technique entails the artificial increase of a crypto asset’s value just before a planned and sudden crash. However, you will be stuck with the unknown coins for a long time if you don’t sell them off quickly enough. Please be aware that nothing is inevitable in the volatile cryptocurrency market; therefore, as a cautionary practice, understand the basic crypto metrics to avoid falling for projects that appear “too good to be true.”

The rapid and parabolic spike in the price of a cryptocurrency is another sign of a pump-and-dump scheme. This is especially relevant if the crypto was previously disregarded, unrecognized or forgotten. In addition, any time you hear a well-known person discuss a cryptocurrency, consider their possible motivations. Many influencers and celebrities have little knowledge of cryptocurrencies; however, if they are paid to do so, they will just promote them (even if they are scams).

As a result, one should be wary of such tactics before believing in the future of unknown crypto projects. So, how can crypto investors avoid the pump-and-dump schemes? Choosing a strategy and sticking to it are crucial components of trading or investing. With this approach, one may ensure that they only invest in cryptocurrency projects or assets with which they are familiar.