rewrite this title What Is A Pump-And-Dump Scheme? – NerdWallet

On Jan. 18, two days before his inauguration, President Trump launched a cryptocurrency bearing his name: Official Trump (TRUMP). The coin quickly soared in value to a market capitalization of roughly $14 billion.

However, shortly after the inauguration, blockchain data revealed that several large TRUMP holders had sold millions of dollars worth of the coin, precipitating a selloff that has brought the coin’s market cap down to roughly $2 billion.

In a Jan. 22 letter to the Treasury Department, the Senate Banking Committee expressed concerns about the ethics of Trump’s latest crypto venture, quoting finance journalist Jacob Silverman, who called it a “classic meme coin pump-and-dump[0]

But what is a pump-and-dump, exactly? And is it an accurate description of the TRUMP coin?

A pump-and-dump is an investment scheme in which a group of people “pump” the price of an asset that has little intrinsic value, such as a meme coin or a penny stock, by spreading hype about it on social media or other mass-communication channels to create a buying frenzy.

Once enough “outsider” investors have bought into the asset, the “insiders” of the scheme — who own substantial amounts of that asset — “dump” their shares at the high, hype-fueled price.

These sales often crash the price of the asset, and that crash generally takes the outsiders by surprise. It often ends with them owning an asset that is worth less than what they paid for it, or with them selling it at a loss.

Today, pump-and-dump schemes are mostly associated with cryptocurrency, where they’re also known as “rug pulls.” But historically, pump-and-dumps often involved small-cap stocks instead. The film The Wolf of Wall Street is the true story of Jordan Belfort, a former stockbroker who ran pump-and-dump schemes on penny stocks via an extensive cold-calling sales operation.

Belfort’s activities eventually drew the attention of regulators such as the Securities and Exchange Commission, leading to his conviction and imprisonment for fraud. Crypto markets, which are less regulated than stock markets, offer today’s Belforts less risk of getting caught.

“The number one way to avoid rug-pulls in crypto is to avoid investing in anything other than Bitcoin,” Alexander Blume, CEO of Two Prime, a digital asset-focused registered investment advisor, said in an email interview. That’s because Bitcoin, he says, is the most established cryptocurrency.

“If trading trending cryptocurrencies, just understand you are gambling. If one must do this, then coins that have been around longer and have large market caps are less likely to completely rug-pull. This includes coins in the top 25 on coinmarketcap.com,” Blume said.

According to Blume, some red flags of a crypto pump-and-dump scheme include high concentration of ownership, vague plans for the future, and listings on low-quality crypto exchanges. Investors can avoid the last of these by sticking to a reputable centralized exchange such as Coinbase, Gemini, Kraken or Crypto.com.

“You should also be wary if a token creator uses a lot of tech jargon to seem intelligent and speak over the heads of regular people — that’s another sign of a likely scam,” Blume said.

Not quite. The story of TRUMP does have elements of a pump-and-dump scheme. The coin was promoted on social media — specifically, by the incoming president posting about it on his X (formerly Twitter) account — which looks a lot like a pump[0]

And a few days after Trump’s X post, a group of major investors in the coin sold large volumes of it in a short span of time, which could arguably be described as a dump.

However, a typical pump-and-dump scheme involves the instigator of the pump (who is typically also the largest owner of the asset) dumping their position. In this case, that would be President Trump himself, whose Trump Organization owns 80% of the supply of TRUMP coin and who initiated the buying frenzy with his social media posts.

But the Trump Organization hasn’t sold its stake, which makes it difficult to accurately describe the recent rise and fall of TRUMP coin as a “classic meme coin pump and dump,” as Silverman did.

However, the coin bears several other resemblances to a pump-and-dump scheme, such as high concentration of ownership and a lack of plans for the project’s future. It could quickly turn into a pump-and-dump in the future if the Trump Organization sells its stake without warning.

The price of TRUMP, although below its all-time highs, is still above its initial offering price as of this writing. The Trump Organization’s stake is subject to a two-year lockup period; it cannot be sold before then.

CIC Digital, the Trump Organization affiliate that launched the coin, has described TRUMP as an “expression of support” and not as an investment.