How to 'Pump And Dump' Properly
One of the most well-known trading strategies is called "pump and dump". It is mainly applicable to assets that are not profitable. The main concept of "pump and dump" is to raise the value of assets and make them lucrative. Once the price goes up, you can profitably sell them. In fact, this strategy is considered as a fraud scheme, nevertheless, it is very popular on the cryptocurrency market.
The methodology of this approach is based on the perfect marketing strategy applied to unprofitable positions also known as a penny stock with the low market capitalization. This marketing consists of false statements, investors confusion, social networking and payed papers. If executed properly, this combination makes market participants think that assets that have a low price are actually worth buying. Such a pressure is supported by the price increase in a “pump” way. Investors see the market activity, notice that the price shoots up, and start purchasing low-value assets.
This is the time when traders who organized the “pump and dump” process start selling. As their assets have a peak value and are demanded by the market participants, the fraudsters easily get rid of those unwinnable positions. As a rule, the selling price at that moment is several times higher than the real asset cost, which allows them earn a lot of money. Naturally, after the “pump and dump” scheme is implemented completely and all assets are sold, their price moved down.
This strategy is as old as time. However, it was really hard to use it before trading became available via the Internet. People had to publish articles in magazines, use phones to talk to the market participants, and so on. Sometimes, special organizations even proposed their services with the help of call centers and massive advertisements companies.
Nowadays, it is much easier to proceed with this scheme. Chats, email spamming, fly-by-night websites with fake news, etc. open a large amount of opportunities for fraudsters. And naturally enough, the “pump and dump” method is common in the cryptocurrency market, given the fact that crypto trading is extremely profitable kind of activity today. That is the reason why the CFTC agency is very concerned about this strategy, as it can have a negative impact on professional market players.