Pump And Dump - How Does It Work?

Pump and Dump
Pump and dump schemes appeared long before the cryptocurrency became popular. For example, in the past fraudsters relied on cold calls providing “inside” information about impending news. However, the Internet now offers a cheaper and easier way of reaching large numbers of potential investors through spam email, social media, and false information.

“Pump and dump” is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.

Jordan Belfort

Anyone who has seen The Wolf of Wall Street movie is familiar with
Jordan Belfort (played by Leonardo DiCaprio), a classic user of pump and dump scheme where brokers would drive up the price of stocks, and then Belfort would dump the large chunks he and his partners controlled, cashing out. Then the stock prices would collapse. Sadly, the movie is based on a true story which took place in the late 80s and eventually led to Mr. Belfort’s downfall, “rewarding” him with a 22-month custodial sentence for his scheming.

On October 23, 2017, Mr. Belfort in an interview with TheStreet(https://www.thestreet.com/story/14320657/1/pump-and-dump-schemes-jordan-belfort.html) said the type of crime that landed him in prison — are still around. “It still happens to this day,” he said. “People use the Internet more now and chat rooms — they talk stocks up.”

Pump and dump schemes in crypto?

Pump-and-dump schemes have been around for years, with scammers making a fortune while victims are left with nothing. The cryptocurrency marketplace isn’t immune. According to a report in the Wall Street Journal(https://www.wsj.com/graphics/cryptocurrency-schemes-generate-big-coin/), there are a lot of “PUMP&DUMP” chats/groups all over the internet, for example, the Big Pump Signal group, which was responsible for $825 million in trading activity over the course of the last six months, resulting in hundreds of millions of dollar in losses for those who fell for the scams.

According to the WSJ, such groups always announce the date and exchange for the pump, that lets the group participants to create a buying madness (FOMO effect) and quickly sell (Dump). That what happened to Cloakcoin, the price rose 50% to $5.77 on the stock market before falling almost a dollar after two minutes. In total, 6,700 transactions valued at $1.7 million were executed, compared with virtually no trading an hour before.

A pump-and-dump transfers money from those who jump on the hype-shuttle when they see the price of an asset gain momentum, to those who initiated the dump. In reality, it is often only the initiator of the pump signal that is able to sell off the asset with a profit before it’s too late.

Don’t smoke marijuana, Mkay
Another good example is Tilray Inc(https://www.bloomberg.com/quote/TLRY:US). This company went public in July, leaving some of the most hyped digital-currency companies in the dust.

Investors are rushing into marijuana stocks, as the prospects for explosive growth in the cannabis industry loom in the immediate future creating HYPE around this industry. This also makes the overnight repo rate on the Tilray really expensive, with the cost of financing a short position for Tilray shooting up to 370 percent, according to data from financial analytics firm S3 Partners LLC as of September 12.

Short-sellers then face a tough decision: Buy shares to close out their short positions at a loss, or hold on and risk even bigger losses. These situations and hype around new cannabis market make a favorable condition to manipulate the price

According to Finance Yahoo, the company’s U.S.-listed shares jumped 29 percent in the prior session (19.09.2018) with 19 million of the company’s 21.7 million floating shares exchanging hands.

Then after the successful pump, a group of people or a company which invested large sums of money to buy a large amount of Tilray started to cash out because the coin became stable at its market cap for a while.

When the group of people who started the pump starts to back out from the coin, the prices start to go down slowly. Once they have gone all the way, to empty the prices of the coins decrease and this is where the actual dumps start. People start to panic and then they start to give up their coin in a hurry to be safe from the loss but most of them end up backing out at the lower price than that of the coin and the people who started the pump get all the profit because they are the only ones with capital and knowledge. - source - https://www.cryptovibes.com/knowledge/pump-dump-strategy-risk/
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Pump and dump schemes are an illegal practice punishable by heavy SEC fines. Though investment advice such as stock tips can be convenient, investors are strongly advised to perform their own research on recommended stocks in order to avoid get-rich-quick schemes such as pumping and dumping.

My original article - https://medium.com/hyperquant/pump-and-dump-56f0e2fea6a

Critics are welcomed