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Pump & Dump: Lessons to Learn From the Investment Market

By Aniket Mittal


Overview:


If you’re an avid Netflix subscriber, you’ve probably watched or perhaps heard about the new Squid Game series. The epitome of a dystopia setting, various contestants perform dangerous stunts and participate in childhood games at the expense of their life. However, although Squid Game became a laughable, fun & adventurous journey for many of us back home, it became a dark reality for those in the cryptocurrency market. With the onset of the cryptocurrency market and social media, pump & dump scams have become more prevalent in the investment market. As conscious investors, it’s important to learn how to avoid these scams to protect our assets as well as supplement personal finance.


Some Important Concepts:


Before we discuss what exactly a stock is, let’s discuss some basic information about investing. An investment can be a viable opportunity for you to attain a profit (or loss) out of your assets. Most commonly, an investment refers to the purchase of stocks or cryptocurrency, which is where this scam most commonly occurs. However, it can be applied to other assets e.g., a car, real estate, annuities or funds.


Stock: A stock is a sum of money that you give a particular company or corporation in order to attain a portion of ownership in that company/corporation (aka equity). Since various companies require constant investments to grow, they allow investors to purchase stock or a portion of the company. This means that if the company grows, so does your money. However, like in the case of a pump & dump scam, an investor pullout causes the company’s value to drop & consequentially, so does the value of an individual stock.


Cryptocurrency: On the other hand, cryptocurrency is a form of online currency whose behavior resembles that of a stock. In other words, the more that people use and invest in it, the higher the price of the cryptocurrency. As a result, an drop in investors such as those during a pump-&-dump will decrease the value of a stock immensely.


Now, you may be asking yourself, what exactly is a pump & dump scam? How have I never heard of it? As defined by the US Securities & Exchange Commission, “in a pump and dump scheme, fraudsters typically spread false or misleading information to create a buying frenzy that will “pump” up the price of a stock and then “dump” shares of the stock by selling their own shares at the inflated price.” In other words, conspirators & major stockholders encourage investors to purchase a certain stock & proceed to rapidly pull out of the stock market, allowing them to sell stock at a profitable higher price but forcing others to sell them at a much lower price. The following graph by CoinMarketCap demonstrates Squid Game coin’s rise to fame increasing the price & rapid pullout decreasing its cost. As you can see, the scam relied on its hype & the decisions of its impulsive investors.


Graph of Squid Game Coin, Taken from CoinMarketap


A Famous Example:


Before we dive into lessons from pump & dump scams, let’s examine the squid game coin scam itself. After the release of the popular Netflix show, Squid Game coin was born. The coin gained attraction as a result of the popularity of the show but also its play-to-earn approach. The idea of investing for a bigger reward sum appealed to individuals. Its coverage on famous news channels like the BBC & CNBC catalyzed its entrance into the gaming world. Additionally, conspirators often prevented investors from selling their stocks. Over 3.36 million dollars were invested before its big crash. The crash left millions of people losing precious assets and savings. Another example of a cryptocurrency scam is Shiba Inu, where prices rose up to 900%. It’s important to note how these scams work before we examine how to learn from them.


Lessons to Learn:


Thankfully, there are various measures we can take to safeguard ourselves from these scams. The following can help you protect your assets & successfully manage personal finance.


1. “If it’s too good to be true; it is.”


If you’re anything like me, you probably heard this quote growing up. This quote is an effective method parents use to prevent kids from falling victim to neighborhood scams. However, it can also apply to the investment market. The promise of purchasing a stock at a low price with a 100+% profit rate can be excessively tempting but it’s not always true. The reward does not always necessitate the consequence. It’s important to set budgets for investments so you and your family are protected in worst case scenarios. Additionally, it’s important to conduct your own research and analysis of the nature of the stock. For example, it’s not always wise to invest in a stock that proliferates rapidly in a short period of time as that stock is extremely volatile and liquid. Rather, investing in stable steady stocks is always better and safer for your assets.


2. “The media is not always your friend.”


Social and news media have become the main catalysts for pump & dump scams. The accessibility of information via the internet coupled with a new hype-based news model breed & grow these scams quickly. Before learning about a new stock or coin on the internet & making a decision impulsively, it’s important to do your own research on the nature of the stock itself. A trader/analyst and/or an app can help you make those tough decisions. Always perform excessive research before making a financial decision.


Specifically, when researching, analyze the trajectory of the currency/stock. Did it grow rapidly in the last week or is it growing for 3 years? Did the value ever drop rapidly? Are there any upcoming events that may impact the value of the stock? For example, apple often likes to reveal its new products at WWDC usually around Spring & Fall. Look for cues to ensure you’re not falling victim to a scam.


3. Look out for “hot tips”.


You may learn about an investment from a close friend, social media, a famous influencer or your favorite news channel. No matter how much you trust your source, always perform additional research. Pump & dump scams rely on a fear of missing out & hype. Missing one opportunity which could potentially turn risky won’t impact you but rather will safegaurd your financial security & personal finance. It’s important to be cognizant of potential risks when making a financial decision.


When considering an investment, it’s important to always do your research and set limits to ensure that you are protected upon unforeseen and unfortunate circumstances. Time and research are your friends and remember to use both of them when making an investment.


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