A pump and dump is an illegal and deceptive practice that mainly occurs in the financial market, particularly in investments related to stocks, cryptocurrencies, and other financial assets. This strategy involves price and information manipulation to profit at the expense of less experienced and informed investors.
The dynamics of a pump and dump typically follow these steps:
1. Pump (Inflation): Market manipulators choose an asset with low liquidity and relatively low value, such as a stock of a small company or a low-trading-volume cryptocurrency. They begin to buy large quantities of this asset, artificially increasing the market price due to sudden demand.
2. Misleading Promotion: Manipulators often employ deceptive marketing tactics and exaggerated information to attract less experienced investors. They might use forums, social media, text messages, and other means to promote the asset as an incredible investment opportunity, claiming that its price will continue to rise.
3. Innocent Investors Enter: As the asset's price starts to rise due to increased demand caused by deceptive marketing and manipulators' purchases, innocent investors are drawn to the action, believing they are entering a profitable deal.
4. Dump: Once the asset's price has been inflated to a satisfactory level, manipulators sell their own positions at high prices, reaping huge profits. This is often done within a short period to avoid detection.
5. Price Fall: With manipulators selling en masse, the supply of the asset exceeds demand, leading to a rapid price drop. Innocent investors who entered the game late typically face substantial losses as the asset's value plummets.
This practice is considered illegal in many countries as it violates fair market laws and deceives investors. Financial authorities frequently monitor and investigate pump and dump activities to ensure the integrity of financial markets. Investors should be aware of such schemes and avoid making decisions based on unverified information or promises of quick and easy profits.
