If you’ve watched the movie Wolf of Wallstreet you know how “Pump-and-Dump” schemes on penny stocks made a couple of Wallstreet dudes crazy rich. In the movie, Jordan Belfort - owner of the investment firm “Stratton Oakmont” and brilliantly casted by Leonardo DiCaprio - is manipulating the price of penny stocks, where they hold a majority stake. Due to the artificial price increase, the penny stocks could be sold profitably since they were bought at a much lower price point.
A very similar scheme is happening today with small volume crypto coins, in real life though. [Telegram’s] (https://de.wikipedia.org/wiki/Telegram_Messenger) messenger groups have grown to be the Eldorado of the crypto community. With a quick Google search, you can quickly come up with groups where “pump-and-dump” strategies are very successful performed on coins that have a relatively low market capitalization. The whole thing works something like this:
- Do the google search and log into one of the group. Usually, you can only read, not write in the group
- Next, wait for an announcement, when the pump takes place exactly. Only the date and the exchange, where the coin can be bought, are announced, but not the name of the coin
- Now, the waiting starts. That’s the time, when the moderators aka “community managers” try to get people “hot” and excited about the coming pump
- Right before the “pump”, the exact coin is finally announced and the group is asked to “pump”, ie to buy the coin collectively
- If all goes well, the “pump” will create a sudden price hike, 100-1000% in the cases we’ve been able to observe, since many group members buy the coin, see the screenshot below for evidence
- Now, moderators will tell you not to sell, but instead to promote the specific coin through social media and their own network. This - in theory - will attract more buyers who were not part of the group so far, which in turn drives the price even higher
The example of “pump-and-dump” groups shows how manipulable coin prices currently are. It remains to be seen if and how legislators will react to these developments. However, it is questionable whether it is even possible to prevent this practice.