What are crypto pump and dump groups? Are they legal?

Pump-and-dump operations, which fraudulently manipulate prices by disseminating false information, have existed in economic contexts since at least the 1700s. For instance, con artists with shares in the South Sea Company started making false statements about the business and its revenues in the beginning of the eighteenth century. 

The plan was to inflate the stock price artificially before selling it to uninformed consumers misled into thinking they were investing in a promising good. Contemporary con artists are following their example with a pump-and-dump strategy known as the South Sea Bubble.

However, with the advent of blockchain technology and the rise of crypto trading, the issue has become broader and more severe. Because government regulation has lagged, cryptocurrencies are especially susceptible to this kind of market manipulation.

In this article, you will learn what crypto pump-and-dump schemes are, how they work and how to spot them.

What are crypto pump and dump groups?

A pump-and-dump scam is a sort of fraud in which the perpetrators amass a commodity over time, inflate its price artificially by disseminating false information (pumping) and then sell what they have accumulated to unwary buyers at a higher price (dumping). Once the perpetrators have fraudulently inflated the price, it usually declines, leaving purchasers who made their decision based on misleading information at a loss.

Self-organized teams of individuals carry out online pump and dump operations. These pump and dump groups organize the scams in plain sight on the Discord server (voice over internet protocol and text chat service) or Telegram (instant messaging app), making it possible for anybody to join the groups without prior consent.

In pump and dumps groups, there is a hierarchy of members and leaders (or admins) who manage the group. Higher ranked members receive the notification that initiates the pump by disclosing the target coin a little earlier than lower ranked users. In this manner, the member has a greater chance of purchasing at a cheaper cost and profiting more from the pump and dump scheme.

Most groups are structured using an affiliation system, where members can move up the hierarchy by recruiting new members. The rating rises in proportion to the number of new members added to the group. In contrast, some organizations have a simplified hierarchical structure with just two levels: VIPs and common members. To join these organizations, a user must pay a charge, typically in Bitcoin (BTC), between 0.01 and 0.1 BTC.

What are crypto pump and dump signals?

A crypto pump signal is a message intended to entice individuals to purchase a cryptocurrency so they can profit from the price manipulation caused by the sudden uptick in demand. After the pumping causes a significant price hike, which are called crypto dump signals, members start selling at a good profit. There are two types of groups on Telegram and Discord that post signals on unknown crypto coins to inflate the value of the underlying coins artificially, as explained below:

The messages in pump and dump crypto groups on Telegram and Discord are usually broadcast in the following ways:

• Info and How-To: These two sections resemble a message-pinned electronic bulletin board. Each segment is made up of a number of rooms, each of which has only one or a small number of messages. The group’s rules, news about the group, information on the affiliation system and frequently asked questions are typically found in the rooms of the info section. Similarly, you may find the guides to the crypto industry or the best practices for taking part in a pump and dump operation in the rooms of the How-To sections.
• Signal: Only administrators may post in this area, which is its central hub. The pump signal and the trading-signal rooms are often located in this area. The administrators talk about the upcoming pump and dump operation in the first room and exchange trading tips in the second.
• Invite: The server’s bots live in the rooms in this section. Here, users can ask the bots for invite links to attract new members or find out how many people joined the server using their invite links.
• Discussion: Group members can converse freely in rooms devoted to various themes in this section.

How do crypto pump and dumps work?

The numerous pump and dump groups on the internet have varying activity levels. The busiest carry out around one pump-and-dump cycle every day. Less active groups may only carry out one operation a week. Other organizations conduct activities when they think the market conditions are favorable. So, can you make money pumping and dumping crypto?

There may be a chance to benefit because a pump and dump technique entails the artificial increase of a crypto asset’s value just before a planned and sudden crash. However, you will be stuck with the unknown coins for a long time if you don’t sell them off quickly enough. Please be aware that nothing is inevitable in the volatile cryptocurrency market; therefore, as a cautionary practice, understand the basic crypto metrics to avoid falling for projects that appear “too good to be true.”

Related: The most common crypto metrics: A beginner’s guide

To understand crypto pump and dump scams, please read through the stages crypto scammers follow to trick the channel members:

Disseminating the basic information

The admins communicate the exchange to be used, the precise start time of the operation and whether the scheme will be FFA or Ranked. If it is free for all, those with a VIP rank receive the message at the same time or a few days or hours before the operation.

Announcement of the goal of the underlying coin

As the operation’s start time approaches, the announcement is repeated more frequently.

Group members are informed of the goal coin when the pump begins. Your position within the hierarchy will determine when you will be informed of the start time.

The name of the cryptocurrency is typically written in a graphic that has been deliberately obscured so that only humans can decipher it rapidly. The obfuscation aims to hinder bots’ from parsing the message using optical character recognition (OCR) techniques and launching market operations more quickly than people.

OCR is the method used to transform text from an image into a machine-readable text format. Your computer will save the scan as an image file, for instance, if you scan a form or a receipt. The words in the image file cannot be edited, searched for or counted using a text editor.

Spreading news to draw outside investors

Finally, market manipulation in crypto begins after the pump starts and the admins post a tweet or share the news, asking everyone in the group to spread the word that the cryptocurrency price is increasing. Aiming to incite the so-called FOMO (Fear of Missing Out) of a fantastic investment opportunity and draw outside investors, users spread their message using Twitter, forums and special chat rooms.

How to spot a crypto pump and dump scheme?

Because information regarding unknown coins is disseminated in Discord and Telegram channels, you might want to ask if crypto pump and dump groups are legal. Pump-and-dumps are illegal in the stock market, but since most cryptocurrencies are not considered securities, cryptocurrency markets frequently operate in legal limbo. Therefore, even though the pump and dump crypto scams are morally and legally dubious, they might not violate any laws that are currently in force. Nonetheless, regulated crypto exchanges treat such scams as illegal.

So, how do you tell if a crypto is a pump and dump? Understanding whether and how quickly someone can execute a pump and dump strategy is crucial for the protection of investors. Although there are no sure-shot indicators of the pump and dump crypto scams, you should not ignore excessive hype around a project or its token as these can be red flags. Therefore, investors should continually evaluate cryptocurrency projects before making informed investment decisions.

Related: How to identify and avoid a crypto pump-and-dump scheme?

The rapid and parabolic spike in the price of a cryptocurrency is another sign of a pump-and-dump scheme. This is especially relevant if the crypto was previously disregarded, unrecognized or forgotten. In addition, any time you hear a well-known person discuss a cryptocurrency, consider their possible motivations. Many influencers and celebrities have little knowledge of cryptocurrencies; however, if they are paid to do so, they will just promote them (even if they are scams).

As a result, one should be wary of such tactics before believing in the future of unknown crypto projects. So, how can crypto investors avoid the pump and dump schemes? Choosing a strategy and sticking to it are crucial components of trading or investing. With this approach, one may ensure that they only invest in cryptocurrency projects or assets with which they are familiar.