It was around June 2017 when I first heard of crypto pump groups in one of the cryptocurrency related Telegram groups I had joined. It was made to sound like a win-win situation for everyone, but it was by no means a new scheme.

Pump and dumps are well-coordinated moves where a group artificially increases the price of a cryptocurrency, only to attract new buyers, who are then ‘dumped’ on by original holders for a sizeable profit.

Since crypto markets are not regulated yet, such schemes are not illegal, but they are certainly unethical, and to my surprise, a lot of people didn’t seem to think so.

How do crypto pump groups operate?

A crypto pump group focuses on first accumulating a large number of members. Typically, the more members, the higher the pump can go. Usually these groups start off as ‘signal groups’, where an admin shares trading signals, calling out anywhere between 2x to 10x profits on low marketcap coins.

After building trust and providing apparent value, these groups usually start doing coordinated pumps, where they claim to be investing millions of dollars into a low-cap coin, dramatically inflating its price.

These groups prey on greed, and more often than not, actually make more money from their own members than people they call ‘outsiders’.

The plan usually begins by shilling a coin on various social media platforms and forums via paid or fake accounts, generating artificial buzz around the coin.

Then, at a certain date and time, down to the minute, a pump is scheduled, but ordinary members are not notified in advance (group admins and the people in their inner circles usually buy these coins before the pump).

Then, the coin is announced at the scheduled time, initiating a buying frenzy, which leads to a price surge, which then pulls in more outside investors/traders who often end up buying the very tokens the pump group members are selling at higher-than-market prices, netting ridiculous profits.

All of this goes down in seconds, and the only people who actually make money are the pump coordinators (since they buy coins and set sell orders beforehand) and pump group members who are fast enough to purchase coins within the first 3 – 5 seconds at market prices.

Everyone else ends up buying too high, since there is no real support for the short-lived price surge.

Why are crypto pumps unethical?

I was personally surprised to see so many pump group participants actually thank admins for the ‘good work’ and for helping them get by, pay their bills and take care of other financial responsibilities. To them, it was a fair game, where the fastest were able to turn a quick profit. I even had people argue that pumps and dumps are just accelerated trading activities, not much different from how markets usually work.

What most people fail to understand is that the whole purpose of a pump is to ‘deceive’ others into investing real money in a token so the original parties can profit by selling much higher than market value.

The whole activity is built upon deception, lies and manufactured market movements, all designed to lure unsuspecting investors.

Some people even argue that people who lose money in pumps are just getting what they deserve, since they joined due to ‘greed’ in the first place.

Disappointingly, what most people do not understand is that for them to profit from a pump, someone else has to lose money due to deception. For each pumped coin they sell, someone else has to become a bag holder, who may never really recover the loss, since the coin’s price is unlikely to see a 900% or even a 500% jump anytime soon, if at all.

This is not the same as trading a token, because market prices are largely, if not entirely, reflective of the public’s perception of a coin’s fair price. With pumps, this price is raised to unreasonable and ridiculous levels by sheer manipulation.

CFTC has been eyeing pumps and dumps

Fortunately, the U.S CFTC has been observing pumps and dumps, and sent out a warning earlier this month, cautioning people from purchasing any cryptocurrencies due to social tips and hype:

“Customers should avoid purchasing virtual currency or tokens based on tips shared over social media. The organizers of the scheme will commonly spread rumors and urge immediate buying. Victims will commonly react to the currency’s or token’s rising prices, and not verify the rumors. Then the dump begins. The price falls and victims are left with currency or tokens that are worth much less than what they expected.”

How to protect yourself from pumps and dumps

The crypto market offers tons of legitimate opportunities to trade, invest and make money from, and a prudent investor will never feel the need to turn towards pump groups.

If you ever observe the price of a token surging suddenly, avoid investing in it without conducting any research. Most pumps last only a few minutes and you can instantly recognize them with the price action and candles with large bearish wicks, depicting a major sell-off in the midst of a buying frenzy.

Even after a pump and dump is over, the coin’s price may retain some of its artificial gain, but that is in no way indicative of positive growth. The price does not instantly drop down to previous levels because those who enter the market late are not willing to part with their coins at huge losses (but they will sell the first opportunity they get).

At the end of the day, whether you’re a trader or an investor, you need to be aware of the crypto market’s unregulated nature. Never believe what you read on social media or Telegram chats and always do your own research before investing your hard-earned money.