Editor’s Note: 22.08.22 – Minor updates to reflect the more generic nature of crypto pump and dump schemes. 

Is crypto a pump and dump scheme? If not, what about other cryptocurrencies and projects like Bitcoin? Is there any legitimacy to these questions, and if not, why do people think this?

Let’s explore the topic of crypto pump and dumps while trying to demystify some of the misconceptions about cryptocurrency in 2022 and its associated technologies.

It is worth noting that this content should be considered financial advice. We have been working in the IT and technology sector for over 30 years. During that time, we have developed insight into crypto that we feel others will find useful.

What is a pump and dump scheme?

Pump and dump schemes are commonplace in any investing market, whether that be crypto or the stock market. They are defined as a scheme that boasts exaggerated and/or misleading information to try and encourage more users to invest. Quite often, this creates hype and a buying frenzy that causes the price to “pump”. Those within the scheme will then sell or “dump” at an inflated price. 

Pump and dump schemes are probably more well known in the stock market, particularly with the Reddit group called WallStreetBets making headline news in 2021 where retail investors were driving up the price of stocks like AMC Cinemas and GameStop. Whether WallStreetBets is actually a pump and dump scheme is open for debate and is explored here. Nevertheless, many of these stocks were subject to pump and dump-like trading patterns, meaning some will have made when selling at the peak and many others will have lost out. 

Price is driven up (pumped) and then sold off quickly (dumped)

 

Are cryptocurrencies like Bitcoin pump and dump schemes?

Quite often traders and whales (larger organisations) will create hype and make false claims to drive the price of the cryptocurrency up, Then, when the project has reached a sufficient valuation, the creators sell their tokens or positions and effectively leave the project for dead.

Usually, cryptocurrencies with smaller market capitalisation are subject to pump and dump schemes. This is because there is less currency in supply and it’s easier to manipulate the market. 

Bitcoin has been active for over 10 years and is a taxable asset that is used as legal tender in multiple countries. It also has the largest market cap and is the most stable of all cryptocurrencies out there, meaning it’s probably the least susceptible to a cryptocurrency pump and dump scheme. These types of schemes require an ‘actor’ to orchestrate and execute this type of plan. Bitcoin doesn’t have one central authority or leader, it was created by Satoshi Nakamoto, which is a pseudonym for whoever created the whitepaper and plans for Bitcoin.

So, is Bitcoin a pump and dump scheme? We can quite comfortably say no. With this being said, many popular crypto projects have been subject to pump and dump schemes. Dogecoin is probably the most well known. So as always, it is worth investing with care, and only investing after you have researched extensively.

Conclusion

The crypto space is still a relatively new and exciting new area. It’s attracting interest and financial input from around the world, ranging from non-professional retail investors at home to global corporations and investment firms.

It’s not all fun and excitement though. There are definitely some valid concerns that need to be taken into account if you are a new investor in the space or have concerns over crypto pump and dump schemes. 

Huge volatility is commonplace and it’s not unusual to see crypto investments grow or drop significantly. This doesn’t mean that the project is a pump and dump scheme or that it will fail. The table here shows how the top two cryptocurrencies, Bitcoin and Ethereum, have dropped over 70% in value since their peak in November 2021. Projects like Ripple (XRP) have dropped over 90%. If you look back over the history of Bitcoin for example, this kind of volatility is normal. Pump and dump schemes tend to happen over much shorter periods of time and may not even be noticeable when you zoom out and look at the price over a multi-year period. It’s also likely that stronger cryptocurrencies (i.e. those with a real utility, like like Bitcoin or Ethereum) will be less impacted by such schemes. 

In summary, we strongly believe that crypto is the future, but that doesn’t mean that any and every project will be successful or legitimate. It’s certainly true that investing in any crypto project is risky. A huge amount of care should be taken when spending any of your personal finances. Hopefully, you now have a better understanding of crypto as a whole, and how a few small negative projects can impact how people think about the space as a whole.