How Pump And Dump Schemes Work

When was the last time someone helped you for no reason in particular? You get private information, someone sends money, or finds someone’s wallet. The help received makes you feel privileged.

It may be luck, goodwill, and also a hook. No matter the purpose, that gift makes you trust the person. 


The same can happen when investing. Imagine getting help from an insider who has privileged information about stocks. The problem is:

  • You don’t know who‘s giving you advice
  • There’re no other sources to verify the data
  • You aren’t special. They sent you the message like they could have done with any other random person.

Everybody talks about the penny stock rise. What they never tell you is their plan to drop the stock after enough fools buy into their tale.

Pump And Dump: How Fraudsters Profit From Mass Psychology

How Fraudsters Profit From Mass Psychology

Pump-and-dump schemes are all about misdirecting the masses to profit from artificial demand spikes.

  • An organized group fakes information and distributes it to victims.
  • They encourage thousands of investors to buy volatile stocks at a coordinated time. 
  • The group buys low and sells high. Victims who bought low will sell high.

Notice that the same group that causes the spike controls the timing. Although this scam does have victims, the scammer never targetted any because they don’t care about your outcome. Unless you have true insider information, the timing will make you lose all your money.

Often the pattern isn’t easy to spot. With coordinated work, a stock can multiply its market price and go down within minutes. You might be lucky to come first, but the last one to sell loses all the money.

Investors expect the group to have some special predictive skills when in reality they are manipulating the stock. After the historic high, many unsuspecting investors will hold with blind faith that the price will surge again. The scammer leaves them on a bear market, changes their identity, and looks for another stock to pump. Or do the inverse short and distort scheme.

Are All Stock Scams Illegal?

There’s nothing ethical in pump-and-dump; the NYSE and NASDAQ have it forbidden. But you can still find micro-cap stocks in the OTC Market, which is how these groups disguise with shell corporations.

But what if the stock scheme is legal? You could lose millions of dollars and have no chance to report. That’s the case of cryptocurrency and less-regulated exchanges.

Many of us are already aware of the risks but let be fooled by other agents’ promises. After all, they can access insider information. Official, infallible, and not-refutable.

The confidence tricks lead hundreds of investors to the wrong stock at the wrong time. Since mistakes happen all the time, losing money won’t make scammers lose their victim’s trust.

How Pump-And-Dump Schemes Work

How Pump And Dump Schemes Work

First things first: you need a unique selling point, the “next big thing.” If you can convince others that “this time is different,” they won’t have as many objections.

  1. Acquisition: The group finds a penny stock and buys most of its shares gradually. They pick an illiquid micro-cap stock, meaning it’s easy to move stock prices by making big transactions.
  2. Promotion: By the time the group has acquired the penny stock, there’s a growing chart they can prove to other investors. They use these artificial numbers to convince others that prices will go up, so they buy the stock.
  3. Distribution: After enough investors join the fad and prices can’t go any higher, scammers will be the first ones to sell. Since they arrived first, they reap the best rewards.
  4. Dump: After selling, the group walks away and stops the fake news. Ripped-off investors find themselves trapped on a negative trend with no way to profit from their shares.
coin telegraph

In the markets, investors expect companies to be transparent with their results. Because decisions are heavily data-driven, any accounting misstatement can lead to expensive losses. 

Despite the dangers, most illegal schemes never reach high enough numbers of victims before they get caught. You should worry more about pump-and-dump scams not forbidden by law.

According to the fraud triangle, scammers look for the best risk-reward ratio. In the case of legal rip-offs, there’re little or no consequences for the con man.

Take cryptocurrencies like Bitcoin. 

  • Nobody can regulate it.
  • Prices change erratically as much as 20% per day.
  • Transfers are anonymous and permanent.

A pump and dump scammer may pump several coins much less popular than Bitcoin, multiply the price, and bring it down within minutes. You can’t regulate, but you can influence a market with low trading volume.

That doesn’t mean non-crypto stocks aren’t prone to pump-and-dump. You can control price increases by influencing buyers. As long as you have proof to convince others of your facts— even if they’re fake— they will believe it and buy.

Pump-and-dumps neither give you enough time to think critically. The agents promoting it often use FOMO strategies to put pressure on your decisions.

Knowing the risks, people get into it because they don’t want to lose an “easy” opportunity. You hear of the ones who make 5X profits and earn $443,597 in one week. But they rarely hear from the 95% who went from X to zero in no time.

Even if you profit from the spike, there’s a majority who has lost all their money to ensure your profits. Stepping on others is what makes these schemes illegal.

3 Highlighted Stock Scams

Highlighted Stock Scams

#1 Bittrex Pump-And-Dump Groups

Bittrex investors trade over a billion dollars per day. The popularity has attracted “scammers” to create pumping groups on Telegram and profit from manipulation.

Pumping goes against the terms of service, and anyone earning money that way can get their account banned. When you Google “crypto pumping groups,” you find hundreds who have normalized these illegal schemes.

#2 Satyam, India’s Enron

For years, the chairman of Satyam Ltd. had been overstating the company revenue. The fourth-biggest exporter in India— 50,000 employees— commits accounting fraud.

After Raja resigned and admitted the scheme, shares fell from $29 to $1.80. 

#3 H&H Imports (HNHI)

H&H owns TV Goods Inc., a company running infomercials, making no revenue, and losing money. Why would the famous rapper 50 Cent promote such stock? This Florida company would distribute his branded headphones.

The catch? Curtis Jackson used Twitter to pump the stock from $0,10 to $0,39, but he never sold his millions of shares. After the fad, prices fell under $0,30 “back to normal.”

(Also, see Lithium Exploration Group, OTC: LEXG)

Pump-And-Dump Red Flags And How To Avoid Fraud

Red Flags And How To Avoid Fraud

Are short-term gains worth the risk? Those signals may be right, but you’ll never know when the group will try to take advantage of you. Unless you stay outside of the game or take preventive measures.

Here are some red flags:

  • Over-The-Counter instead of NYSE or NASDAQ. Small companies can’t qualify for the mainstream exchanges, but you can still list on the OTC. Guess what foreign trading means? Your money leaves the territory, and the law can’t prosecute potential schemes.
  • Has the company registered in the Securities Exchange Commission (SEC)? If so, what’s its history? Trusting an agent’s promises with no background is like paying upfront to get a reward. Advance-fee scam.
  • Reverse Merge: The scammers’ private company merges with a shell company already public on the exchange. This process helps the company to go public faster while eluding verification steps.
  • Inconsistent Values: A stock that’s been inactive for years won’t just go up. In the market, supply and demand are the cause and effect, not artificial pumps.
  • Paid Groups/ Pay-to-invest: Red flag of advance fee fraud.

In the best case, you’d make money, which excites you for the next pump until you eventually lose it all. If you do make money fast, don’t wonder if you lose it just as fast.

What’s the purpose of all this marketing? To make others believe something about a stock that it’s not. Not only they will promote one story; they’ll make sure the contrary is difficult to find.

If you research on your own, you may find only one source or no information at all. When you lack the perspective to review a stock, it’s not reliable to put money on it.

Why will it go up now precisely? You can ask them questions about the plan.

Some groups will be openly selling themselves as a “Pumping group,” inviting you to make a profit. Although they might have good intentions for you, they can’t remove the risks. The exchange platform reserves the right to take down your account if they link you to this activity.

Wrapping Up

Wrapping Up

It is possible to profit from pump-and-dump schemes, but you can only win so much. Scammers design them to make them money, making victims the ultimate losers.

Before you invest thousands on the next opportunity, consider better ways to make money fast. High Yield Investment Programs could work, although you need to research cautiously given the many scams out there.

If you’re serious about making money fast, it might be a better idea to start an agency or online business. Active sources of income grow faster than passive investments.

One last proven way to make money fast: report pump-and-dump schemes. Gather original information, and you can earn 10-30% of the sanctions that surpass $1 million.

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