Pump and dump refers to a manipulative trading strategy in which the price of an asset is artificially driven up in order to subsequently sell large positions at a profit. This pattern occurs particularly frequently in the crypto market, especially with illiquid or lesser-known tokens.
A pump-and-dump scheme consists of two phases. First, the price is pushed higher through coordinated buying and aggressive promotion ("pump"). This is followed by an abrupt sale of holdings by the initiators ("dump"), which leads to a rapid price collapse and leaves late buyers with losses.
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Process of a pump-and-dump scheme
During the pump phase, artificial demand is created. This often takes place via social media, messaging groups, or influencers who spread unrealistic price targets or alleged insider information. Rising prices and trading volumes generate FOMO (fear of missing out), prompting additional market participants to enter.
In the dump phase, the initiators sell their token holdings into the market. Since demand is usually only short-lived and lacks any fundamental basis, the price falls rapidly. Liquidity dries up, and the price often returns to, or below, its initial level.
The crypto market is open around the clock, globally accessible, and in some areas still lightly regulated. Many tokens have low market capitalisation and limited liquidity, which facilitates price manipulation. In addition, new projects often lack transparent reporting, allowing false information to spread more quickly. These factors make crypto markets more susceptible than established equity markets.
Legal classification
Pump and dump is considered market manipulation in most jurisdictions and is punishable by law, particularly when false or misleading information is disseminated. Regulators are increasingly taking action against such practices in the crypto sector as well. Investigations target both organisers and promoters who knowingly participate in misleading investors.
Retail investors bear the greatest risk, as they often enter the market late. Without sufficient liquidity, positions can hardly be sold after the dump. Losses can be substantial and frequently occur within a very short period of time.
