A pump and dump is a type of market manipulation wherein a number of persons artificially push up the price of a certain asset like a cryptocurrency and then sell it all at the top, thereby leaving the unsuspecting buyers suffering heavy losses. The “pump” indicates a rapid increase in price and the “dump” a moment when the manipulators sell everything at once.
To start with, the scheme relies on a hype that is totally coordinated. The promoters hype the token with, among others, exciting claims, mostly its potential is exaggerated or false information is going around—throughout social media, group chats, or online forums. At first, the price increases very fast, which is highly suggested by the people who start to believe in the story and buy. The attraction of the price going up still more draws in further buyers who are afraid of being left out, thus driving the price up.
The people who are behind the promotion already determine the price that they are going to start to sell at. Their rapid sell-off brings the price down as fast as it went up. The first promoters pocket their profits while the late buyers are the ones left with the tokens that have lost most of their initial value.
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In the traditional markets, the pump and dump schemes are illegal and in crypto, they are monitored more and more. They ruin trust and make prices bounce opposite to real value and may even take away the whole amount of money from novices. To put it in simple terms, it is a trap driven by hype that is set up to enrich a small percentage and at the cost of everyone else.