What is pump and dump?
Pump and Dump is an illegal and prohibited activity carried out by individuals or a group of investors. In Malaysia, the Securities Commission of Malaysia has issued warnings to investors who misuse social media platforms to spread false information about specific companies to execute pump and dump activities.
Typically, pump and dump aims to inflate the price of stocks or assets through false recommendations. These recommendations are based on false statements that are disseminated. Those engaging in pump and dump already have a significant position in the company's stock and will sell the shares after successfully increasing the stock price through their fraud and manipulation.
This activity also occurs in the world of cryptocurrency investment, where a group of people collaborate to increase the value of a coin. They will buy the coin initially and sell it after attracting enough attention from investors.
Shariah Perspective
The crypto industry is highly exposed to manipulation and fraudulent activities due to the lack of strict regulations. One form of manipulation that occurs is pump and dump. Usually, low market-cap coins are targeted. This activity has become easier with the advent of social media platforms. By creating sudden price increases, new investors are often easily deceived into buying the asset in hopes of making quick profits.
One of the prohibited elements in pump and dump activity is hoarding (ihtikar). We agree with the Mufti of the Federal Territories (Malaysia) regarding hoarding. According to Imam al-Syairazi, hoarding is when a person buys goods at a high price and withholds them with the intention of increasing the price.
Two factors related to the price fluctuations in this discussion are at-tullah (number of enthusiasts) and the strength of demand. When there is an increase in the number of people wanting to acquire a particular item, the price of that item tends to rise. Conversely, if demand for that item is low, the price tends to fall. This is a basic concept in economics.
However, in the context of the "pump and dump" discussion, these price fluctuations occur due to the demand and purchases made by those who are deceived and misled by irresponsible individuals or groups of investors attempting to manipulate market prices.
Therefore, due to the presence of fraud and manipulation in investment, this practice has the potential to harm other investors. Hence, the act of organized pump and dump is considered haram and contrary to Shariah. This is in line with one of the main Islamic legal maxims:
"There should be neither harming nor reciprocating harm."
Thus, it is clear that Islam prohibits and does not promote any form of harm.
Conclusion
In summary, we can clearly see why "organized pump and dump" is not only haram but also unethical and contrary to human morals. It is our responsibility as Muslims to stay away from it and not engage in this activity, even if it has the potential for significant profits. Furthermore, we advise investors out there to be cautious and always conduct due diligence on any type of investment.