Taking advantage of people's fear of not missing out, a coordinated group of investors misleadingly inflate an asset's price. When other traders buy in, raising the price further, the original investors start selling, thus creating a pump and dump scheme.
Pump and Dump schemes are as old as securities on the stock markets. Because they rely on increasing the asset's trading volume and lock up as much liquidity as possible, pump and dump schemes target low market cap targets - penny stocks and small cryptocurrencies. Social media platforms have made it easier than ever to coordinate pump and dump operations.
When investors engage in such illegal activity, they will usually follow up with promoting the crypto asset or give some other false information. For example, they could promote a rumor that the coin will be listed on a major crypto exchange. Before that, they would have already bought up as much coin as they could at a very low price.
In turn, this would create buying pressure and increased trading volume. Combined with the rumors and other hype, innocent traders would want to ride the bullish wave. However, only the core group of investors would know the precise moment of the pump.
Correspondingly, they would benefit the most when they sell - dump - the coin when it reaches its highest price point. If other investors join early enough, they may too earn money if they are prepared to quickly sell. However, most people tend to lose out in pump and dump operations.
The biggest tell that something shady is going on is when the price spike coincides with some promotional activity on social media. More tellingly, if the promoters have newish media accounts or names for their companies. In all cases, these schemers rely on human psychology called FOMO - fear of missing out.
At this point, the entire world knows that people who bought Bitcoin at under €100 are now millionaires. Consequently, this piece of information will be in the back of people's minds when they see a rising crypto star. More often than not, though, this star will plummet and erase their investments.