Pump and Dump Scam – What Is It and How to Recognize One

Navigating the complexities of financial investments is a difficult job. Your financial safety is jeopardized not only by market conditions but also by unscrupulous people who try to steal their slice of the cake.

One scheme that has recently risen to prominence among fraudulent circles is the notorious pump and dump scam. Today, we will examine how this particular strategy works, which telltale signs betray it, and how to get back the money lost by investing in one.

What is a Pump and Dump Scam?

The easiest way to describe a pump and dump is to compare it to a speculative bubble. This bubble happens when an asset on the market significantly exceeds its intrinsic value due to exaggerated market enthusiasm and investor speculation.

In layman’s terms, it means that the investors start paying much more money for some item than its actual worth in the real world. As the investors buy out the asset, its price keeps increasing, creating a vicious cycle.

One of the first cases of this sort of market behavior is the Tulip Mania of the XVII century. During the 1630s, people were recorded exchanging a dozen pigs for a single bulb of a highly sought-after flower. Inevitably though, this led to an eventual market crash that left many flower merchants impoverished.

The confidence tricksters that try to push a pump and dump work on creating the conditions for a speculative bubble artificially. They may use several different methods to achieve their task, but the end result is always the same: swindlers fill their pockets with money and leave the investors hanging.

How Does the Pump and Dump Scheme Work?

Generally speaking, a pump and dump strategy involves artificially inflating the value of an asset in order to capitalize on it. It incorporates a carefully orchestrated series of events.

The first part of the scheme is spreading misleading information on social media. Many recent NFT pump and dump scam operations started out this way. Swindlers were known to “hype train” various assets, sometimes even organizing celebrity endorsements of their products.

After the fake project gains momentum, con artists restrict the amount sold on the market. With high demand and low supply, asset values skyrocket – “go to the Moon” in internet slang. Once the price of the fake asset reaches its apex, the schemers flood the market and capitalize on the price while it’s still inflated.

The instrument subsequently depreciates, with the fraudsters being the only ones getting any significant profits. The rest of the traders can only look in despair as their investment melts into nothing.

Scalping Scam

Modern market technology allows for the execution of a huge number of orders in a short time span. This will enable fraudsters to abuse the technology in a number of ways.

One of the common strategies is front-running, a practice of placing large volume orders before the institutional investors do so. This shifts the market price, creating an opportunity for the swindlers to sell their assets to other investors at a larger cost.

Another strategy, spoofing, involves creating a large number of small orders. This is known to trigger signals on automated trading programs, which start executing additional orders, leading to more asset appreciation. Swindlers, being the early investors, can then scoop up the money and vanish.

Stock Shorting Scam

Short selling, or shorting, is a viable market strategy when a stock has a negative market trend. It involves borrowing shares from a broker to sell them on the market, after which the trader will again purchase the shares and return them, pocketing the difference.

Fraudsters may engage in deceptive practices that inflate the assets’ price drop, creating an opportunity for larger profits. Another version of this scam, the naked short selling, involves selling shares without actually borrowing them.

Examples of Pump and Dump Fraud

Recognizing fraudulent intentions is never easy. Researching the past pump and dump scheme cases, however, will give you further insight into how to spot them more easily.

Here are a few of the most notorious schemes in history:

• RCA Radio Pool – The earliest example of pump and dump securities fraud was completely legal at the time. It involved a group of investors calling themselves “The Radio Pool”, who colluded to inflate the price of RCA Victor in 1920 to a then astronomical worth of $549. Soon, though, the price would stabilize back at $10 per share, ruining many contemporary investors.
• Squid Game Token – Con artists abused the popularity of a Netflix series to launch their product, SQUID, which was purchasable by the general public. The token price saw an all-time high of $2,861.80 thanks to it being covered in mass media. Before long, though, the swindlers took the token’s liquidity pool off the blockchain, rendering it worthless.
• One of the most known examples in the history of Forex and market manipulation frauds is the case of Jordan Ross Belfort. Known as “The Wolf of Wall Street” this former American stockbroker pledged guilty to several crimes that involved pump and dump stock scam that cost investors over $200 million.

How to Protect Yourself?

We always like to emphasize the importance of knowledge and research when advising our audience on how to avoid this or that type of scam. Nothing can fool you into depositing your hard-earned money into suspicious schemes when you’re informed enough and have a realistic approach to the situation. 

The simple use of common sense goes hand in hand with that. When being offered to invest into a brand new crypto project, for example, you should always ask yourself just how realistic the promises of high returns are.

While keeping yourself informed and level-headed, you won’t be led into thinking that you’re being offered a lifetime proposition. Con artists often heavily rely on urging their targets to invest by instilling the fear of missing out. That’s exactly how they get their targets hyped up and full of anticipation, willing to spend millions on a crypto fake pump.

Lastly, before investing in something that’s still fresh and yet unproven, it’s always more valuable to do some research and rely only on regulated companies and world-acclaimed enterprises to handle your investment.    

What to Do If You Fall Victim to a Financial Fraud?

Crucial element in the midst of despair of being scammed is not remaining silent. Almost every related government website has an option to report pump and dump scams. If not, then jurisdictional financial regulators play a key role in dealing with fraudsters. For example, US citizens can file a complaint on the CFTC  or FINRA website. 

If you don’t feel like dealing with complex chargeback procedures, there’s always ways to get legal support from a professional. Our experts can guide you through the process and provide the necessary support. For more information on the issue contact our live chat agents.