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Pump and Dump

A “pump and dump” is a type of market manipulation scheme where the price of an asset (often a cryptocurrency or stock) is artificially inflated, or “pumped up”, to attract unsuspecting investors. Once the price reaches a certain level, the manipulators “dump” or sell off their holdings, causing the price to plummet and leaving the new investors with worthless or devalued assets.

Key Points:

  1. Initial Hype:
    • The manipulators often start by spreading positive news, rumors, or misleading information about the asset to create hype and excitement. This can be done through social media, online forums, or even fake news articles.
  2. Price Inflation:
    • As more and more investors buy into the asset based on the positive sentiment, its price begins to rise. This further attracts more investors who don’t want to miss out on the “next big thing.”
  3. Sudden Sell-off:
    • Once the price reaches a predetermined level, the original manipulators start selling off their holdings for a profit. This sudden influx of selling pressure causes the price to drop rapidly.
  4. Unsuspecting Losers:
    • Investors who bought the asset at its peak, believing in its potential, are left holding an asset that’s now worth much less than what they paid for it. They incur significant losses, while the manipulators walk away with a profit.
  5. Regulation and Legality:
    • Pump and dump schemes are illegal in many jurisdictions, especially in regulated stock markets. However, they are more prevalent in less regulated markets, like some cryptocurrency exchanges.

Examples:

  • Chat Groups:
    • There are known instances where groups on messaging apps or online forums coordinate to buy a particular cryptocurrency en masse, pumping its price. Once outsiders start buying in, the group members sell off their holdings.
  • Promotional Emails:
    • In the stock market, unsuspecting investors might receive promotional emails highlighting a particular “hot stock” that’s poised for growth. This is often a ploy to get them to buy in and pump the price.
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