Pump and dump is the intentional increase in the price of an asset followed by a deliberate crash in its value. This scheme is categorized as market manipulation and has been around long before the emergence of the digital currency market, but it has gained renewed prominence with the development of the crypto industry.
The psychology of buyers tends to favor goods with higher prices over less expensive alternatives, and traders are no exception. Many investors are drawn to assets with higher prices.
The manipulative strategy of pump and dump capitalizes on this psychological quirk and is actively employed in the cryptocurrency market today.
How does it work? Organizers of the scheme, possessing substantial capital, mass-purchase low-cost and typically lesser-known coins. This creates artificial hype around the asset, attracting new buyers. As demand grows, the price rises. This is referred to as a "pump."
A "dump" always follows a pump. It occurs when the investors who initiated the hype decide to exit the game. They sell the asset at a price that benefits them, making a substantial profit. Unsuspecting traders who are not aware of their manipulations incur significant losses due to the sudden crash in the price.
One of the most prominent examples of pump and dump in the crypto market is the story of the Squid token in 2021. The coin was named after the popular Netflix series 'Squid Game,' although it had no real connection to the show. Nonetheless, this didn't prevent it from causing a frenzy. In a short period, the coin's price skyrocketed from just over a cent to $2,800. However, within minutes, it plummeted back to just a few cents.