Crypto Coin Pump and Dump: Understanding the Risks and Regulations

Crypto coin pump and dump schemes can be devastating for investors, with some scams netting millions in a matter of hours. The rapid price increase is often fueled by fake or artificially inflated news, making it difficult for investors to distinguish fact from fiction.

In the United States, the Securities and Exchange Commission (SEC) has taken action against several crypto coin pump and dump schemes, resulting in significant fines and penalties. The SEC's efforts aim to protect investors and maintain fair market practices.

Investors often fall prey to these schemes due to a lack of understanding about the underlying technology and market dynamics. A single tweet or social media post can spark a frenzy of buying and selling, sending prices skyrocketing.

The SEC has also warned investors about the risks of investing in crypto coins, citing the lack of regulation and oversight in the industry. This lack of regulation can make it difficult to identify and prevent pump and dump schemes.

Pump and dump is a strategy built on the artificial sharp growth of the cryptocurrency due to the coordinated actions of the participants, followed by a price collapse.

There are different types of pump and dump strategies, including those based on technical analysis, which involves trading on patterns, support and resistance levels, and Fibonacci.

Pump and dump strategies can also be based on fundamental analysis, which involves trading at the start and end of forks, based on news from developers.

The ones based on psychology, also known as "hamsters" and "whales", involve trading by understanding the principles of market participants' actions.

Here are the three main types of pump and dump strategies:

The organizers of a crypto coin pump and dump scheme start by selecting a relatively unknown cryptocurrency with a stable sideways trend, which costs a few cents and has an interesting legend behind it.

They buy the coin in small volumes, creating a news background in the media and on forums to attract more participants.

The organizers then engage in insider trading, investing in the asset to make the price move up.

As the price rises, traders buy the coin, accelerating the price increase.

At the peak of the first pump wave, the organizers sell a large number of the crypto asset, causing the price to drop.

The price is allowed to drop to a psychologically agreeable level, and the organizers buy the coin again, provoking a second wave of growth.

A typical pump and dump scheme can involve multiple waves, with the organizers completely exiting the market at the peak of the second wave.

Here's a breakdown of the steps involved in a crypto coin pump and dump scheme:

Here's how pump and dump schemes work:

Organizers select a relatively unknown cryptocurrency with a stable sideways trend, often with a small price and an interesting legend behind it. This coin is usually chosen because it's not on the radar of most crypto investors.

The organizers buy the coin in small volumes to avoid premature growth, while creating a news background in the media and on forums to attract more participants. They also engage in active advertising, praising the cryptocurrency and predicting its future success.

As the informational background warms up traders, they start buying the coin, causing the price to accelerate. At the peak of the first pump wave, the organizers sell a large number of the crypto asset, causing the price to drop.

The organizers then allow the price to drop to a psychologically agreeable level, buying the coin again to provoke a second wave of growth. This second wave is usually higher than the first, and at its peak, the organizers completely exit the market.

Here's a step-by-step breakdown of the process:

Keep in mind that this is a hidden pump and dump scam, where only the organizers know about the growth, and the rest of the participants are being used.

Celebrities and influencers often advertise cryptocurrencies, but it's essential to remember that many of them have little to no knowledge about crypto and are mostly paid to hype up the coin.

They are usually paid to post pre-written articles and pre-made videos on their profiles, which can be misleading and even part of a scam.

Don't rely solely on their word, as they might not even be aware they're being used to promote a scam.

Influencers and celebrities might be unaware they're being scammed, but that doesn't change the fact that their endorsement can be a red flag.

Cryptocurrency markets are prone to pump-and-dump scams due to unclear regulations. Avoid scams by trading known cryptos on reputable exchanges like Coinbase or Binance.

If you see a relatively unknown cryptocurrency being touted by internet strangers, don't rush to get in. Look up the token, find its white paper, and read through it. Determine who's behind it and what the objectives are.

Red flags to watch out for include a project with no clear purpose, unrealistic benefits, or a development roadmap that's not well thought out. If the project has disappeared or been abandoned, it's best to avoid it.

Check the listing of the coin on the top cryptocurrency exchanges and CoinMarketCap websites. On such platforms, startups undergo a scrupulous check and obvious potential scams are not included in the listing.

A strong rise in price is the dream of many cryptocurrency investors, but investing on a sharp rise puts you under the risk of getting into a "pump and dump", which always ends in a scam. Ask yourself if there's a real reason for the price increase.

Try to avoid coins worth a fraction of a cent. Some exchanges try to lure traders by offering zero exchange commission. Their price is easier to manipulate.

Here are some warning signs to look out for:

Investing in startups that have only been around for a few months is also a risk. Serious projects develop for more than one year.

To avoid falling victim to a crypto pump and dump scam, do your research on the token and its project. Check if it has a clear purpose and realistic benefits, and if its development roadmap is well thought out.

If you see a relatively unknown cryptocurrency being touted by internet strangers, don't rush to get in. Look up the token, find its white paper, and read through it to determine who's behind it and what the objectives are.

A strong red flag is if the project has no clear purpose, or if its development seems to have disappeared. Another red flag is if the project is associated with previous bad actors.

If you discover a potential crypto investment on social media, check if the project has its own website and social media presence. Go straight to the source instead of relying on information from third parties.

Here are some warning signs to watch out for:

If you don't find any red flags, take a look at how the cryptocurrency trades. If it's on a well-regarded exchange, it's more likely to be a safer investment.

Anonymous founders are often a red flag for illicit activity or fraud, as they're usually hiding from liability. Ninety-nine times out of 100, it's not because they believe in anonymity, but because they want to hide.

If a founder has revealed their identity, it's essential to research that person, including looking up personal information and understanding the token they're issuing. As Carlton suggests, if it sounds too good to be true, it often is.

A token's first few trading hours can be telling, as scams often grow quickly and then collapse just as fast. In fact, Carlton notes that a scam will sometimes "grow like it's the hottest thing on the exchange, and then everyone gets out very quickly."

Involuntary pumps can occur when media people unintentionally promote a crypto asset, making it harder to prove their intent. Famous people don't need to pump assets to earn money, but a few words from them can still increase demand.

Theoretically, a pump should have an organizer who coordinates the group and provides necessary information. However, spontaneous pumps can happen without a clear organizer, making them difficult to track.

A few words from media people can be enough to pump an unpopular crypto asset. This can happen even if the famous person doesn't intend to promote the asset.

The cryptocurrency space has seen consistent and "media" pumps, where a few words from a famous person can increase demand. These pumps can be difficult to track because they often lack a clear organizer.

Anonymous founders are a red flag for some form of illicit activity or fraud, though some perpetrators are now abandoning anonymity.

It's still an indicator, because if someone won't tell you who they are, they're doing it for a reason. Ninety-nine times out of 100, it is not because they have a strong belief in anonymity, it's because they want to hide themselves from liability.

Researching the founder's identity can provide valuable insights. This includes looking up personal information as well as understanding the token that the person is issuing.

If it sounds too good to be true, it often is. A good indicator of a scam is when the token grows rapidly in its first few trading hours, only to have everyone get out quickly.

Regulators consider "Pump & Dump" schemes to be illegal, as they believe prices should be formed exclusively by market methods, and any artificial manipulative actions deceive investors.

The question of whether these schemes comply with the law is ambiguous, making it difficult to prove intentional collusion among investors, identify participants, and hold them accountable.

Regulators admit they have no clear legislative grounds for suppressing such pump and dump schemes in cryptocurrencies, partly due to the unclear legal status of cryptocurrencies in some countries.

It's almost impossible to identify participants on the anonymous cryptocurrency market, making it a challenge for regulators to stop these occurrences.

Regulators have been trying to address the issue, but so far, their efforts have been limited, such as the Australian ASIC's attempt to infiltrate a large closed pump channel in 2021, which resulted in the channel being closed and its participants warned about possible fines and legal proceedings.

As of 2025, the IRS requires you to report cryptocurrency gains and losses on your tax return. This includes income from trading, selling, or exchanging cryptocurrencies.

The IRS considers cryptocurrency to be property, not currency, which means it's subject to capital gains tax. You'll need to file Form 8949 to report your cryptocurrency transactions.

If you're trading cryptocurrencies frequently, you'll need to keep accurate records of your trades to calculate your gains and losses. This includes keeping track of the date and price of each trade.

The IRS also requires you to report any cryptocurrency income, such as mining or staking rewards, as ordinary income. This includes any income earned from lending or borrowing cryptocurrencies.

The question of whether pump and dump schemes are illegal is complex. Regulators consider them to be illegal because they involve artificial manipulative actions that deceive investors.

It's difficult to prove intentional cahoot of investors, as a price surge due to panic can be mistaken for a legitimate market movement. Identifying participants in the scheme is also a challenge, especially on the anonymous cryptocurrency market.

Regulators admit they lack clear legislative grounds to suppress pump and dump schemes in cryptocurrencies. This is partly due to the unclear legal status of cryptocurrencies in some countries.

Regulators don't have effective tools to influence pump participants and stop their occurrence. However, they're not giving up, as seen in the Australian ASIC's attempt to infiltrate a large closed pump channel in 2021.

The "Crypto pump and dump" strategy is more unethical than illegal. If an investor voluntarily invests in a sharp rise in digital asset value and can't withdraw funds before the collapse, they can't prove fraud.

The crypto market can be a breeding ground for scams, especially pump-and-dump schemes.

The barrier to entry for creating a new cryptocurrency is just a little bit of research and coding knowledge, making it easy for scammers to create thinly traded currencies.

Pump-and-dump schemes often start with an organizer gathering influencers in a private group online to coordinate buying and selling the target crypto asset.

The organizers will then share information about the trade with their followers on social media, creating hype and getting the general public to buy in.

Newly formed cryptocurrencies are largely unregulated, making it unlikely for scammers to face repercussions when their claims turn out to be false promises.

A person or group can create a token and make wild claims about its use, and it's unlikely they'll face repercussions when those claims turn out to be nothing but false promises.

The cost of joining pump and dump schemes is often paid in BTC or ETH.

The operation of a pump-and-dump scam can occur in plain sight of the public, usually across Discord servers, where anyone interested can join.

Self-organized teams can conduct an online pump-and-dump scam, with a hierarchy of leaders or admins and members, where information is disseminated depending on rank.

High-rank members usually receive notifications earlier on and get information about the target coin, allowing them to buy the asset at a lower price and make greater profits afterwards.

Celebrity promotion of crypto should generally be considered a warning sign, as it can create hype and get people to buy in without doing their due diligence.

Most investment schemers reap their profit by making people losers, and there can't be winners achieving above-average returns without losers.

The timescale of modern pump-and-dump schemes has shortened, with many pumps lasting only seconds to minutes before the peak is reached.

The cryptocurrencies most vulnerable to pump-and-dump schemes are the less popular ones with a low-market cap, due to their low liquidity making them easier to manipulate.