Pump and dump (P&D) is an illegal activity when wealthy individuals buy a certain cryptocurrency when the price is low, promote the investment and afterwards dump all purchased coins when the price is high. These actors consist of well-organised individuals, sometimes aided by a whale. They usually choose low trading volume cryptocurrencies so they could easily dictate its price. The process in practice looks as follow:
1. Buy a vast number of a low volume cryptocurrency at a good price (by doing so the price drives up so it is easy to advertise the investment)
2. Massively promote the investment on Twitter, Facebook and Reddit
3. Wait for investors who do not know that this is a pump and dump scam to join in and pump the market with their money
4. As soon as the price reaches the desired level, participants of the scam get out and sell all the coins at a new and better price
5. Individuals who were not aware of the scam and did not get out in time end up owning a “cheap” cryptocurrency that they purchased when the price was high
Pump and dump scenario is feared by both cryptocurrency exchanges and cryptocurrency developers because such activity can destroy a good reputation in the blink of an eye.