What is pump and dump?

Unfortunately, the financial world is no stranger to fraudulent schemes, and one of the most notorious is the pump and dump. Originally rooted in the stock market, particularly in penny stocks, this fraudulent practice has found its way into cryptocurrency trading. But what exactly is a pump and dump scheme, how does it work, and—most importantly—how can you protect yourself? Let’s break it down.

• Pump and dump schemes artificially inflate an asset’s price through hype before orchestrators sell off their holdings, causing a crash

• Once common in penny stocks, these schemes have become more visible in crypto markets, where regulations are still evolving

• Social media and influencers often play a key role in spreading misleading hype to lure in unsuspecting investors

• To avoid falling victim, watch out for sudden price spikes, unrealistic promises and assets promoted by anonymous developers

What is a crypto pump and dump?

A pump and dump is a form of market manipulation where the price of an asset is artificially inflated or “pumped” through misleading or exaggerated claims, only for the scammers to sell off their holdings at the peak, causing the price to crash or “dump”.

While traditionally associated with the stock market, particularly low-value stocks, the pump and dump meaning has expanded with the rise of cryptocurrencies. Even though the crypto market is becoming more regulated, it is often driven by social media hype, making it a prime target for scammers looking to exploit unsuspecting investors.

The history of pump and dump schemes

Pump and dump schemes have existed for decades, long before cryptocurrencies emerged. In the 1980s and 1990s, these scams were most commonly associated with penny stocks, where promoters would aggressively market little-known companies, often with false or exaggerated claims, to drive up the stock price. Once the stock reached a high point due to retail investor demand, insiders and early buyers would sell off their shares, causing the price to crash and leaving late investors with significant losses.

These schemes were particularly rampant in boiler room operations, where brokers used high-pressure sales tactics to convince unsuspecting investors to buy into worthless or overvalued stocks. Some of the most infamous cases involved firms like Stratton Oakmont, the brokerage firm portrayed in The Wolf of Wall Street.

How does a pump and dump scheme work?

Pump and dump schemes follow a predictable pattern:

1. Selection of a low-liquidity asset: Scammers choose a cryptocurrency with a low market cap, meaning its price can be influenced with relatively little capital. 

2. The pump - hype and promotion: A coordinated effort begins to generate buzz around the asset. This could involve social media hype, false endorsements from influencers or misleading news . 

3. FOMO (Fear of Missing Out) kicks in: As retail investors see the price rising and hear about “massive gains,” they rush to buy in, further driving up the price.

4. The dump: Once the price peaks, the scammers sell off their holdings at a profit. With no real value behind the surge, the price collapses, leaving late investors with heavy losses.

Many investors fall for pump and dump schemes due to psychological factors. The fear of missing out on a “once-in-a-lifetime” opportunity pushes people to buy in at the peak. Scammers exploit this by using urgent language like ‘Act now!’ or ‘Next 100x coin!’ to create a sense of exclusivity and time pressure. To avoid falling for these frauds, always take time to research a project, check whether the price surge is backed by real fundamentals and be wary of investments driven purely by social media hype.

Are pump and dump frauds illegal?

Yes, pump and dump schemes are illegal in traditional financial markets. Regulatory bodies like the U.S. Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA) actively monitor and prosecute stock market manipulation.

However, crypto market regulation has only recently caught up. The Markets in Crypto-Assets Regulation (MiCAR), which came into effect at the end of 2024, explicitly prohibits manipulative practices like pump and dump schemes across the European Union.

Under MiCAR, crypto projects must adhere to stricter transparency and disclosure requirements. Exchanges operating under the framework must monitor for suspicious trading activities, making it harder for scammers to execute pump and dump schemes undetected.

Bitpanda has secured MiCAR licenses under two European regulators, Germany's BaFin and Malta's MFSA, positioning itself to operate seamlessly across all 27 EU member states under this unified regulatory framework.

How do scammers benefit?

Pump and dump organisers profit by selling at the peak before the price collapses. They usually buy the asset cheaply in advance and then use tactics such as:

• Coordinated mass-buying to create a false sense of demand

• Spreading misleading information to attract unsuspecting investors

• Timing the sell-off at the height of public interest

How can you avoid falling for a pump and dump scam?

Recognising the warning signs can help you stay safe in the crypto market:

• Extreme hype: Be wary of coins being promoted heavily on social media, especially by unknown influencers.

• Unrealistic promises: If something sounds too good to be true (e.g. “guaranteed 10x returns”), it probably is.

• Low market cap coins: Small-cap cryptocurrencies are easier to manipulate.

• Sudden price spikes: A rapid, unexplained increase in value is a red flag.

• Anonymous developers: Coins with no transparent team or project roadmap are riskier.

The pump and dump definition remains the same whether it is stocks or cryptocurrencies: artificial price inflation followed by a rapid crash. While crypto markets are exciting, they are also vulnerable to manipulation. Always do your research, avoid hype-driven investments and never invest money you can’t afford to lose.

Stay safe and informed with Bitpanda Academy

Crypto scams are constantly evolving, but knowledge is your best defence. The Bitpanda Academy offers many resources to help you stay secure in the crypto world, covering common crypto scams, the biggest risks in investing and more.