Inside the Pump and Dump Schemes in the Cryptocurrency Markets


  1. Pump and Dump schemes are one of the most common practices of market manipulation in both stock and crypto markets.
  2. Scammers pump the price of certain crypto pairs, they cash out and dump these coins, resulting in huge losses of the naive investors
  3. Before investing in low-cap coins, we advise all our users to research thoroughly about the projects, their team, investor backing, technicals, and fundamentals

What are Pump and Dump Schemes in Cryptocurrency Market?

‘Pump and Dump’, one of the most common jargons used in the crypto industry, but not for good reasons. 
The term derives its meaning from a common security fraud used for manipulation in the equities markets. 
A small group of investors buy shares of small-cap stocks which causes an initial jump in stock prices. 
Once enough investors have been misled into purchasing the stock seeing the rise in prices, the initial group of investors will sell their holdings to take profit, before the price collapses and all following investors make heavy losses.
Similar schemes run with small-cap cryptocurrencies. 
Online Telegram and Discord groups conspire to pick up micro-cap coins having a low trading volume on various exchanges.
Sometimes traders blindly follow the rising price and indicators mentioned in these groups without actually consulting or performing their own analyses.
Once the scammers pump the price of certain crypto pairs, they cash out and dump these coins onto the naive investors who bought those coins thinking it was the next big thing. 
Now imagine the same activity happening in Margin trading where traders have to face losses multifold. 

Pump and Dump occur in two particular ways.

How to Identify such Schemes?

Crypto traders and influencers actively participate on Twitter, Telegram and Discord, sharing their views about different cryptocurrencies and often try to shill their tokens. We have often noticed that many scammers try to shill low market cap, illiquid tokens hoping to fool people by creating FOMO around such tokens. Due to the low market cap and illiquidity in the market, carrying out a pump and dump schemes is very easy. Once other traders enter this illiquid market, these scammers sell those tokens in bulk causing a fall in price. A fall in price triggers the liquidation of multiple trades which further leads to an even bigger fall in price. 

The easiest way to identify a pump and dump scheme is when unknown coins’ price rises for no valid reason. You could use other methods such as, going on Twitter and searching for more information about such tokens. All valid reasons, if any, around that token will be present on Twitter. You can also join our Telegram channel to discuss with 10,000+ traders and get their views on this current rise in price. 

Always remember pumping the price of a small market cap, an illiquid token is easier than pumping a high market cap, liquid token (for example Bitcoin, Ether, etc.) You can check the trading volume of different cryptocurrencies here.

Lastly, DYOR! It is imperative you conduct your own analysis by reading more news and going on the project’s website and their communications pages before investing in them. Also, it is advisable not to trade such tokens on margin especially due to the high risks caused by the high volatility in those markets.

Recent Incident on CoinDCX

At CoinDCX, we have always worked hard to ensure that our traders are protected against cryptocurrency scams, including pump and dump schemes. A few days back, a couple of traders on CoinDCX tried to conduct a pump and dump scheme where the price of a few low market cap and illiquid tokens like YOYOBTC were raised without any reason. This caused other traders to get drawn towards the pairs of these cryptos. Many traders also took leveraged positions on the pairs of these cryptos. The tokens were soon dumped by these traders which led to the liquidation of margin trades for many traders resulting in huge losses. For the traders which took positions on Margin, their losses were significantly higher than the loss they had to face on only one pair because their margin positions were more than 2x. To compensate for the losses, open positions on Margin were liquidated by our automated systems. 

We had to freeze the trading accounts of all the traders involved in this scheme to protect other users from further losses. We have also decided that we will, henceforth, liquidate the positions of traders in case our algorithm suggests that these are pump and dump schemes. This decision has been made to protect all the users and ensure they do not suffer losses. Recently, to protect our trader’s losses, we added dynamic algorithms to our Margin product which automatically delists tokens and adjust leverages based on their market liquidity, trading volume, and price volatility. 

Also read: Information in AI, ML and Blockchain.

Final Caution

All the users, whether new or experienced with crypto-trading need to be aware and alert of such activities. Before investing in cryptocurrencies with low trading volume and market capitalization, it is extensively imperative to research the projects thoroughly, their team, investor backing, technicals, and fundamentals. As mentioned above, a sudden jump in price without verified news backing the increase is an indicator of a potential pump and dump scheme unfolding. Contacting cryptocurrency projects directly on their community channels and getting your questions answered is an even better way to research a coin before investing in it. We recommend you to take all possible precautions before investing your hard-earned money in micro-cap tokens and do your own research (DYOR) and keep yourself informed about such frauds and malpractices in the industry.

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