Cryptocurrency Pump & Dump

The volatility of the cryptocurrency market often attracts traders. No one is surprised by a 10% change in price per day. During a pump, the coin’s price increase is above 100% most of the time. It attracts new investors who are easily excited by the increase. As investors unknowingly buy the pump, scams dump the asset in near perfect coordination. With no new buyers coming into the market, the coin quickly loses value and investors are left agonising over their wallets. It’s the classic pump-and-dump scheme — a trick used by people seeking profits on the crypto market by deceiving others.

pump and dump

The principle of this scheme

Step one — pump, i.e. price inflation. The tactic is simple. Big market participants – the so-called whales – start making large buys. This will result in a large price increase. When the price increases by 10-15%, the other traders notice this growth and also begin to buy this coin. Prices increase even more, which attracts more eager to get rich.

Step two — dump, meaning, sell coins as quickly as possible — once they reach a preset target price. The scheme involves a large holder of a particular cryptocurrency exiting their position at market price, leading to a quick over-supply of tokens which causes prices to plunge rapidly. This resulting in other holders selling their coins for a lower price than having bought minimising losses creating a major dip in the price. But they are already in the red, and the whales begin slowly buying cheap coins preparing for the next pump and dump.

Pump & dump schemes have been around since long before cryptocurrencies even existed, they were a driving force behind the inflated stock market of the early 20th century. The difference is this: at the moment, cryptocurrencies are particularly vulnerable to this kind of fraudulent activity. There are two main reasons why it works so effectively:

  1. FOMO — fear of missing out. It is the psychological concept of buying something because of the fear that we may miss out on hypothetical future earnings, like it was with Bitcoin, Ethereum and other successful coins. Because of this concept, emotionally unstable traders buy a lot of useless stuff because they fear they may miss out on a huge bargain.
  2. Informational influence — ads and tips to buy the cryptocurrency on the Internet chats, forums, and social communities. Sometimes it is presented as secret information from private sources. Newbies rush to buy the advertised coin and fall into the trap by trusting the information on private channels or provided by a “crypto expert”.

How to spot a pump and dump?

If developers share a new version or software update, add new products and services to their project, then the coin price on major exchanges can be naturally increased by a double-digit percentage. If you ignore this event, you can miss the chance for investment and profit. Therefore, it is necessary to be able to distinguish such natural growth from a pump.

That’s why one needs to closely follow the project development and the news that the developers post on their websites and in the official forum threads. If the coin rises in price due to the positive news coming through the major thematic media, then this indicates its importance for the crypto community. That’s the promising altcoin worth investing in. But if the coin rapidly rises in price without any news, most likely, it has become a tool for a pump.

Also, manifold increase in trading volume can be a significant indication of a pump. Whales prefer low volume coins with small capitalisation as they are easier to pump and their trading volume increases tenfold.

Should you join a pump and dump group?

Any growth allows you to earn, even a pump — after all, that’s what it is about. But don’t forget that pump organizers will try to do the same with you. Before you get involved in this game, you need to weigh all pros and cons: how long the pump will last and what will be the high point of the coin. We expect to take 50-100% of growth with small altcoins, while the growth of coins with large capitalisation may be of 20-40%. And if growth has exceeded half of these values, then the risk of losing investments, being among those joined at the peak, is higher than the chances of earning.

You should also be careful about joining pump and dump groups, where participants decide the coin that is to be pumped and when. In most cases, after the coin has been picked, the organizers buy enough of the coin to take advantage and only then release the coin’s information to the rest. As a result, it turns out that you will pump the price for others, while they already dump their assets and you will be in the red.

pumps and dumps

In general, pump and dump schemes are risky and doubtful. The risk becomes even higher considering that this method is already regarded as illegal in many countries across the world and therefore, the possibility of anonymous trading is reduced. It will be better to avoid such schemes because there are plenty of honest and profitable ways to boost your revenue in the crypto market.

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