In finance, where profit opportunities abound, a darker side often rears its head in the form of elaborate and unethical schemes. The pump-and-dump white-collar scheme stands out as a particularly deceptive maneuver.
Defining “pump-and-dump” schemes
A pump-and-dump scheme refers to a type of fraud that artificially boosts the price of a stock, cryptocurrency or other asset. This type of boost, known as “pumping,” may occur through false or exaggerated recommendations. After the boost, the perpetrator sells off their own holdings. This portion of the scheme, known as the “dumping,” floods the market with the asset and causes the price to drop dramatically. As a result, the unsuspecting investors must have overvalued assets that will rapidly lose value while the original perpetrator of the scheme enjoys their substantial profits.
Pump-and-dump schemes in the age of social media
Pump-and-dump schemes have a long criminal history, but the modern age of social media provides criminals with greater access to the “pumping” up stage of the crime. Criminals use the Internet to artificially boost prices through fake news, social media posts, podcasts or misleading emails. This manufactures hype that leads to an asset’s value skyrocketing.
Avoiding pump-and-dump schemes
Knowledge provides the best defense against white-collar crimes, including pump-and-dump crimes. Educate yourself about any potential new investments. Take the time to research and understand their actual value and potential. Do not rely on word of mouth or online posts. If the only information you can find includes only positive information, consider that the information may include false “boosting.”
To avoid falling prey to pump-and-dump schemes, consider the following:
- Always conduct your own research.
- Verify the credibility of any source.
- Remain wary of any unsolicited offers.
- Avoid investment offers that involve high-pressure tactics.
- Watch for sudden spikes in trading volume and price.
Pump-and-dump schemes appeal to unsuspecting investors because they offer riches, yet ultimately lead to financial catastrophes. By understanding how they work and remaining vigilant, you can protect yourself from falling victim to these fraudulent tactics.
