Crypto Pump and Dump Scams are Never Worth it, Here is Why

If you have checked different news, communities and social media related to cryptocurrencies, there is a very good chance that you have already stumbled upon the term “Pump and Dump.”

A concept and malpractice inherited from the stock market into crypto, pumping and dumping schemes consist of a large group of organized investors purchasing an asset with a low market capitalization in order to influence and inflate the prices. Then, the goal is to dump the asset as quickly as possible, turning a profit and leaving the asset to plummet back to its previous values - quite often, even lower. The practice gained new traction with cryptocurrencies because, while small assets in stock markets may have 100, 200 million market capitalization, cryptocurrencies are not regulated by traditional exchanges and often have much smaller projects - which are supposedly easier to manipulate.

However, with every fraudulent practice, things are much easier said than done. Pump and dump schemes are after all, as the phrasing states, schemes. In this article, we explain why crypto pump and dump scams are not worth it, detailing the main aspects of countless downsides related to joining these groups, that you can actually be jailed for participating. Not to mention just being straightforwardly bad for you, mentally and financially.

Pump and dumps are illegal

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There is no way around it - although most cryptocurrency practices including pump and dumps are not regulated in most countries, the traditional strategy of pumping and dumping small “penny” stocks is entirely illegal in most nations. It’s considered fraud and market manipulation, and people caught running pump and dump schemes are often subject to hefty fines or even face jail time.

In the United States, through the Securities and Exchange Commission (SEC), it’s not uncommon for these lawbreakers to face up to four, five years of jail time for getting involved with this particular market fraud. And the fines, sometimes to avoid jail, go up in the house of millions of dollars. Other countries are even far more severe, such as Australia. Their Securities and Investments Commission (ASIC) tends to sentence pump and dump scammers for up to 15 years of jail time. Hardly seems worth it.

Although those examples reference pump and dumps in the traditional stock market, regulations for cryptocurrency scams are right around the corner. Both countries mentioned are leading the pack in crypto policies, so it’s a short matter of time before these frameworks affect crypto scammers as well.

You are not the shark, you are the bait

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Most crypto pump and dump schemes occur in messaging social media platforms, like in Telegram and Discord groups. When a new member has joined, it looks as if they have struck pure gold: all they have to do is pay attention on when to buy a particular crypto, and then make lots of money. Sounds easy enough, right? As mentioned previously, things are easier said than done.

Crypto pump and dump scams usually accumulate tens of thousands of group members before making their first move. The crowd anxiously waits for the target coin to be announced, before buying frenetically. But the reality is: the crowd is not in on the scheme, quite the contrary - they are the bait in order for the scheme to be successful.

The ones really profiting from the scheme are the group owners, the admins who announce the crypto right on time for the baits to buy it. Why are they the ones profiting? Because they actually bought the asset weeks, sometimes months before announcing it as a purchase for the group. While the crowd is buying and selling frantically, struggling to find the right time to sell (there isn’t), the scam creators already sold on their positions right as the pump started - leaving the followers to pick up the pieces of whatever is left of potential earnings, or usually more losses.

Low liquidity will make you lose your money

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A crypto asset with 1, 2 million dollars in market capitalization is obviously not nearly as popular as Bitcoin, Ethereum, with their market caps in the houses of hundreds of millions.

To put it simply, there are way fewer people interested in purchasing low market cap cryptos than in high market cap ones. Since crypto pump and dump scams rely on low market cap assets, most people interested in buying the asset when the scam is taking place are, well, those involved in the scam.

This is one of the reasons why those in charge of the scam sell so early. While their sell positions are already in place while the order books are hot from the flood of crowds coming in, the scam followers struggle to sell once the dust has settled and there’s no one else to buy off them. That’s something that seldom people think about when joining crypto pump and dumps: you have to sell, but who is going to buy it back from you? Most baits in the pack are left stuck with their low-value assets, waiting for a time that may never come when they might sell without losing their initial investment. That is rarely possible.

It goes against every investment principle

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Whether it be cryptocurrencies, stocks, bonds, commodities, fixed income or what have you, investing is something to be taken seriously. It requires research, consistency, assessments of your investor profile, a diversified portfolio and. most importantly, humility.

Crypto pump and dumps sound too simple, too good to be true because they are. Otherwise, the best-case scenario is that you will inevitably lose your investments the longer you stick with them. Worst case scenario, you’ll lose all your money and also face severe legal consequences. Hardly seems worth it. Therefore, refrain from involving yourself in these scams and strive to pursue the same path that all great investors have: the path of research, consistency and reason.



Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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