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

Pump-and-dump operations, which fraudulently manipulate prices by spreading false information, have existed in financial contexts since at least the 18th century. For example, swindlers holding shares in the South Sea Company began making false statements about the business and its earnings in the early eighteenth century.

The plan was to artificially inflate the share price before selling it to uninformed consumers who were misled into thinking they were investing in a promising good. Contemporary fraudsters follow suit with a pump-and-dump strategy known as the South Sea Bubble.

However, with the rise of blockchain technology and the rise of crypto trading, the problem has become wider and more serious. Because government regulation has lagged, cryptocurrencies are particularly vulnerable to this type 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 type of scam where the perpetrators accumulate an item over time, inflate the price artificially by spreading false information (pumping) and then sell what they have accumulated to unwary buyers at a higher price (dumping). When the perpetrators have fraudulently inflated the price, it usually goes down, and buyers who made their decision based on misleading information lose out.

Self-organized teams of individuals perform online pump-and-dump operations. These pump-and-dump groups organize the scams on the Discord server (Voice over Internet Protocol and text chat service) or Telegram (instant messaging app), making it possible for anyone to join the groups without prior consent.

In pump-and-dumps groups, there is a hierarchy of members and managers (or administrators) who manage the group. Higher ranked members receive the notification that starts the pump by revealing the target coin a little earlier than lower ranked users. In this way, the member has a greater chance to buy at a more reasonable price and earn more from the pump-and-dump scheme.

Most groups are structured using an affiliation system, where members can move up in the hierarchy by recruiting new members. The ranking rises in proportion to the number of new members added to the group. In contrast, some organizations have a simplified hierarchical structure with only two levels: VIPs and regular members. To join these organizations, a user must pay a fee, usually 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 buy a cryptocurrency so that they can profit from the price manipulation caused by the sudden increase in demand. After the pumping causes a significant price increase, which is called cryptodump signals, members start selling at a good profit. There are two types of groups on Telegram and Discord that post signals on unknown cryptocurrencies to artificially inflate the value of the underlying coins, 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 parts are similar to an electronic bulletin board attached to messages. Each segment consists 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 about the affiliation system and frequently asked questions are typically found in the rooms of the info section. Similarly, you can find the guides to the crypto industry or the best practices for participating in a pump-and-dump operation in the rooms of the How-To sections.
• Signal: Only admins can post in this area, which is its central hub. The pump signal and 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 robots 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 talk freely in rooms dedicated to different topics in this section.

How does crypto pump and dump work?

The many pump-and-dump groups on the internet have varying levels of activity. The busiest ones perform about one pump-and-dump cycle each day. Less active groups can only carry out one operation a week. Other organizations conduct activities when they believe market conditions are favorable. So, can you make money pumping and dumping crypto?

There may be a chance to take advantage of it because a pump-and-dump technique involves an artificial increase in 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 fast enough. Please note that nothing is inevitable in the volatile cryptocurrency market; Therefore, as a cautionary practice, understand the basic crypto calculations to avoid falling for projects that seem “too good to be true.”

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

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

Dissemination of basic information

The administrators communicate the switchboard to be used, the exact start time for the operation and whether the arrangement will be FFA or ranked. If it is free for all, those with VIP rank receive the message at the same time or a few days or hours before the operation.

Announcement of the target of the underlying coin

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

Group members are informed of the target coin when the pump starts. Your position in the hierarchy determines when you will be informed of the start time.

The name of the cryptocurrency is usually written in a graphic that is deliberately hidden so that only humans can decipher it quickly. The obfuscation aims to prevent bots from analyzing the message using optical character recognition (OCR) techniques and initiating market operations faster 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 example if you scan a form or a receipt. The words in the image file cannot be edited, searched for or counted with a text editor.

Dissemination of news to attract external 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 inflame the so-called FOMO (Fear of Missing Out) about a fantastic investment opportunity and draw investors outside, users spread their message using Twitter, forums and special chat rooms.

How to spot a crypto pump and dump scheme?

Because information about unknown coins is spread in Discord and Telegram channels, you may want to ask if crypto pump-and-dump groups are legit. Pump-and-dumps are illegal in the stock market, but since most cryptocurrencies are not considered securities, cryptocurrency markets often operate in legal limbo. Therefore, while pump-and-dump crypto scams are morally and legally questionable, they may not violate any laws currently in effect. Nevertheless, regulated crypto exchanges treat such scams as illegal.

So, how do you know if a crypto is a pump and dump? Understanding whether and how quickly someone can execute a pump-and-dump strategy is critical to the protection of investors. While there are no surefire indicators of a pump-anddump crypto scam, you should not ignore excessive hype surrounding a project or its token, as these can be red flags. Therefore, investors should continuously evaluate cryptocurrency projects before making informed investment decisions.

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

The rapid and parabolic rise in the price of a cryptocurrency is another sign of a pump-and-dump scheme. This is especially relevant if the crypto was previously ignored, unknown or forgotten. Additionally, whenever you hear a famous person discussing a cryptocurrency, consider their possible motivations. Many influencers and celebrities have little knowledge of cryptocurrencies; but if they are paid to do so, they will only promote them (even if they are scams).

As a result, one should be cautious 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 can ensure that they only invest in cryptocurrency projects or assets that they are familiar with.