How Does 'Pump And Dump' Work?
The "pump and dump" strategy has been around for years. This scheme allows you to quickly, raise the value of unprofitable assets and then to sell them, making a profit due to price increases. Although this scheme is illegal, it is very popular in the field of blockchain and cryptocurrencies.
According to the strategy, the price of an unprofitable unit (so-called penny stock with a low market capitalization) is artificially increased due to ideally designed marketing. Fictitious statements, confusing investors, a lot of publications in social networks and fraudulent articles − all these tricks are used to convince market participants that a useless asset is in fact a very profitable purchase.
To support these statements, the price of a loss-making asset moves up very quickly, thanks to an ideally designed "pump." When investors learn about such promotions and notice that their price increases rapidly, they start buying.
And at this very moment, people who organized and launched this scheme, start selling revalued assets. They earn money by selling the stock at a record price ‒ usually it is several times higher than the amount of money invested. As soon as they sell their shares off, the price begins to fall.
Before the invention of the Internet, such a scheme was difficult to use. People had to do this with the help of phones or even regular post. Often, these strategies were initiated by "Boiler Rooms" ‒ that is, call-centers, which were well-known for using deceptive sales strategies.
As soon as the Internet got common, it became easier to use the scheme. Now people communicate via chat rooms, messaging applications and such, so it's easy to start "pumping and dumping". That is why, the CFTC agency is extremely concerned that this strategy can have a bad impact on professional traders.