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What Is Crypto Pump and Dump – How Does It Happen?

What-is-Crypto-Pump-and-Dump-CoinQuora
  • What is the definition of ‘pump and dump’ in cryptocurrency trading?
  • How does pump and dump happen and how will you spot it?
  • How does pump and dump affect the traders?

Introduction

In simpler terms, pump and dump are ‘fraudulent price manipulations’ already present in economic settings since the 1700s. However, in crypto trading, this is a more complex situation that requires immediate action. This phenomenon has become prevalent again this 2021.

There has been limited literature and study about crypto pumps and dumps. Because of this, many fall prey to this kind of scheme. The crypto market itself is vulnerable to this phenomenon.

So, what are crypto pumps and dumps? How does it work? Why should you be cautious of it? What do you do when you get caught up in this scheme?

Crypto Pump and Dump

First, let us define crypto pump and dump. This kind of scheme is a situation where a group of people or an individual plans to pump an asset into the market and dump it to make a profit. The term ‘pumping’ refers to purchasing large quantities of coins to push the price and the demand of a certain coin, higher. It can also be referred to as artificially raising a price through spreading incorrect information then once the price increases, they will start ‘dumping’ or sell it off at a higher price.

Crypto pumps and dumps appear on cryptocurrency markets because of its unregulated environment.

How Crypto Pump and Dump Works

Generally, when the individual or group of people who started the whole scheme exits the markets, the publicity will, of course, subside. With this, the prices will decrease and those who believed and participated in the intended pump and dump will then lose the value of the asset they bought once the prices drop (as it is falsely pumped).

In most cases, scammers target unpopular coins which will not need much money to manipulate. Aside from this, they eye ICOs (initial coin offerings) to acquire more money. In other words, scammers would not think of stimulating Bitcoin pump and dump into a Bullish run because this will require lots of capital.

People Behind the Crypto Pump and Dump Scheme

The people behind this scheme are fraudsters, opportunists, or just groups of individuals whose aim is to make a profit.

Some groups even provide crypto trading signals that are just carrying out pump and dump schemes. These people appeal to new traders who do not have enough trading experience and try to gain their trust. Once they do, they charge fees for the trading signals but the trader will never know where the signals originally come from. Perhaps, these signals originated from the manipulators—but then again, they will never know.

Influencers can also take part in this kind of scheme. Today, influencers have become trusted sources of relevant information. They now have the ability to persuade many people with what they are promoting.

When an influencer who has a questionable trading background or cryptocurrency experience suddenly promotes a digital coin and promises high returns on investment, be wary. This may sound good but it’s not always true.

As a trader, one must have a distinct and sound insight or sense of judgment towards the sources that you see or read. Check its reliability first, before trusting such sources.

How Fraudsters Do the Crypto Pump and Dump Scheme

The group of people behind these schemes exert a lot of effort when pumping and dumping crypto. Targeting crypto requires intensive preparation and analysis.

The first thing they do is to gather the group dedicated to manipulating the market. Often, they choose the ones who are already well-informed about the crypto market, and at the top of their list are market analysts. Afterward, they divide the group into small units and then distribute them to different areas, to cover bigger markets.

Secondly, they get the funds they need to start purchases. Then, they begin vigorous campaigns for the coin’s publicity. This is needed to affect the emotions of traders. The goal is to make these traders feel FOMO or fear of missing out; that way, they will be more interested in investing in the coin the fraudsters are promoting.

After doing all these things, the fraudsters would then monitor the token carefully and sell once its price reaches its peak—this is where maximum returns happen. They will try to sell as many tokens as possible, especially because the peak only lasts for a few hours; hence, they need to take advantage of it.

Once maximum returns occur, these fraudsters turn to crypto exchanges and then move their newly collected funds to their wallet quickly.

Protecting Yourself from the Crypto Pump and Dump Scheme

To avoid falling victim to crypto pump and dump you must first detect it before it even happens. However, it is not easy to identify that this scheme is already happening. This is the reason why scammers behind it are seldom discovered by the authorities.

When spotting a crypto pump and dump, it is important to note if there is an unknown coin suddenly rising significantly without a solid reason why. This might be it—an indicator of the scheme.

Other signs of a crypto pump and dump are:

  • Price Movements

Some charts have a set benchmark for price increase in fixed minutes. This is a good feature because, through this, you will see the unnatural rise of that certain coin immediately. Price swings are one of the major signs of the crypto pump and dump. Sharp price swings demonstrate the schemers’ efforts in pumping the coin.

To know how the coin’s volume changes and how its price rises over time, you can check the coin’s price chart along with its history. Here, you will see the obvious way schemers pumps the coin substantially.

  • Promotions

Paid news articles can also be a sign of pumping. When you notice a surge of social media activity surrounding a small-cap coin or cryptocurrency project, this could be an indicator of the scheme’s beginning period.

Masterminds also make use of online chat groups to spread wrong information about the coin. The total number of people involved in these groups can reach up to 200,000. Often, Discord and Telegram are used in this kind of scheme through anonymous and private channels.

It is important to know the source of the coin you are thinking of investing in. Once you see an unpopular coin suddenly trending on social media sites like Twitter or showing up in Facebook ads or perhaps receiving unsolicited investment offers, these are reasons to be wary.

  • Trading Volume

It is also important to regularly check the coin’s trading volume in trustworthy coin market charts. Here, you can see the liquidity of a certain coin and if it appears to have thin liquidity, this only means that the buyers and sellers aren’t enough to stabilize pricing.

In other words, market makers might not be interested in that particular coin. This reveals the ability of a coin to spike up through time or not. Coins with thin liquidity are more vulnerable to pump and dump schemes because these are easier to manipulate.

  • Market Capitalization

To get a coin’s market capitalization, you just need to multiply its price by the supply. Groups who facilitate pump and dump target coins with low market cap. Low market cap displays lesser trading activity and this is one major factor that these schemers consider when choosing which coin to manipulate.

  • Regulations

There are crypto exchanges that are seldom regulated and this is why these exchanges are more prone to pump and dump schemes. It is said in an analysis that heavily regulated exchanges seldom experience this kind of scheme. Because actually, the price spike usually just happens in a single exchange—the vulnerable ones.

To sum it up, once an unknown coin with a few million dollars market cap suddenly gains attention and social media surges, one should be cautious in investing in this particular coin because there is a high chance that this is only a product of pump and dump scheme.

Investing in crypto or ICOs is indeed risky, which is why one should be careful at all times before taking any investment actions.

Conclusion

Cryptocurrencies are rapidly gaining attention today. Because of its uncharted regulations, pump and dump schemes are likely to happen repeatedly—which is why traders have to be alert at all times. As an investor, your safety and security must be your top priority.

Nonetheless, some communities and institutions keep investors safe. A cryptocurrency is your money, property, and commodity—which is why protecting it is the right thing to do. Before diving into the world of crypto trading, you have to understand the market completely. Besides, it is normal to check if the coin you are planning on investing, is stable or not.

Today, several cryptocurrencies are taking the market by storm, like Bitcoin, Ethereum, Ripple, and many others. These cryptocurrencies shaped the future of digital trading into a solid one. for example, Bitcoin is the oldest cryptocurrency available in the market. It continues to serve as an anchor to other cryptocurrencies in the present. Currently, the value of Bitcoin keeps on increasing and depicts the stability of digital currencies.

Moreover, in trading, what matters is you choose the coin that you trust the most. Sometimes, it may be inevitable for traders to fall victim to schemes such as the crypto pump and dump, but it is important to rise from such occasions.

Being volatile, digital currencies are high-risk investments—it is advisable to study the market first. Remember, there are pros and cons for everything; hence, the decision is entirely up to you.

Disclaimer: This article mainly focuses on explaining the concept of the crypto pump and dump. This does not contain suggestions and call-to-action on pump and dump, because a trader has the sole discretion to his trading actions and decisions.

Cho Amisola is a passionate writer for both creative writing and digital publishing. She’s been featured and published in both areas and is now focusing on blockchain news.