Crypto Pump and Dump: How to Avoid Scams?
The Pump & Dump strategy appeared long before cryptocurrencies. Presumably, it came from the stock market. It can be explained by the fact that the organizer of the pump and dump schemes chooses a low-liquid asset with a consistently low cost and artificially accelerates the price, skimming the cream at the peak. Someone considers it a scam, while others, on the contrary, take part and enjoy the excitement. In this article, we will explain how a pump is created, how to recognize a pump using examples, and how traders can make money on it.
What is Pump and Dump?
Cryptocurrencies are a relatively new type of digital assets, but the number of strategies invented for them is already impressive. The trading approaches can be divided into three groups:
- The ones based on technical analysis: trading on patterns, support and resistance levels, Fibonacci.
- The ones based on fundamental analysis: trading at the start and end of forks, based on news from developers.
- The ones based on psychology: trading by understanding the principles of market participants’ actions (“hamsters”, “whales”).
The Pump & Dump scheme could be classified as the third type of strategy, but it is better to call it a separate category. Many consider it a scam – on the Internet you can find the definition of “pump and dump fraud”. Yes, it is, but who said you can’t take part in it?
Pump & Dump is a strategy built on the artificial sharp growth of the cryptocurrency due to the coordinated actions of the participants, followed by a price collapse.
Pump & Dump schemes can be compared to hype – these are also pyramids in a sense, but this does not reduce the number of people who want to participate in them. It’s all about excitement, from which traders get no less pleasure than from a successful deal. Indeed, money is not always the goal – trading can be exciting and sometimes the experienced emotions are much more valuable than money.
How do Crypto Pump and Dump Schemes Work?
The organizer (pool of organizers) makes every effort to popularize the token. Within a few days, prices grow by 100% or more. Then the organizer collects the profit after selling his coins.
Theoretically, this scheme is organized as follows:
- The organizer of the pump (person or group) selects an asset. It should be a relatively unknown cryptocurrency with a stable sideways trend, which means crypto investors are not interested in it. The coin should cost a few cents and be far from the top, but have an interesting legend behind. Most often, little-known tokens are chosen for the dump scam.
- A coin is bought in small volumes – so that there is no premature growth. At the same time period, a news background is being formed in the media and on forums. The organizers are also engaged in active advertising – they praise the cryptocurrency, predict future success for it and attract more participants to purchase.
- At the start of the pump, organizers join in the form of insider trading and invest in the asset so that the price moves up. Warmed up by the informational background, traders buy a coin, the price accelerates even more – the demand for crypto investing increases.
- At the peak of the first pump wave, the organizers partially satisfy the demand of the “hamsters” and sell a large number of the crypto asset. The price moves down.
- The organizer allows the price to drop to a psychologically agreeable level and buys the coin again, provoking a second wave of growth. Traders see growth and think that there was a correction providing false promises.
- The second wave is usually higher than the first and at its peak the organizers completely exit the market. However, the number of waves depends on the organizers themselves.
This is an example of a hidden Pump & Dump scam when only the organizers know about the growth. The rest of the participants are simply being used, so be careful if you see unreasonable praise of some little-known coin so as not to become a participant in this kind of manipulation.
The crypto community on the Net is full of advertisements for chats and groups offering to people an attractive target to unite, create a pump, and earn more money. The organizers of such Telegram channels use the power of tens of thousands of participants and often earn not only on the Pump & Dump strategy, but also on paid access to their private exclusive chats.
Pump and Dumb schemes are considered in the Wall Street stock market (this is where this strategy appeared) as fraud, but this is arguable. Each broker warns the trader about the potential risks of losing the deposit, and every trader accepts them. Such traders are driven by the desire for easy money, but they don’t perform a detailed market analysis and lack knowledge. They lose money solely because of greed, so who is to blame? In addition, most of the pump participants know what they are involved in.
Examples of Pump and Dump
Theoretically, pumps should have an organizer who coordinates the pump and dump group and provides the necessary information. But there are examples of spontaneous pumps, the “unwitting” organizers of which are media people. Such pumps can be called “involuntary” because it is impossible to prove their intent. Besides, everyone understands that famous people simply do not need pumps – there’s no point for them to earn money in such a way. But one fact is undeniable: a few words are enough to pump an unpopular crypto asset. A few examples of consistent and “media” pumps in the cryptocurrency space are discussed below.
An interesting example of a pump and dump is the E-coin incident. On February 6, 2018, the little-known cryptocurrency rose in price by 4,742%. It took the cryptocurrency startup just one day to break into the TOP-100 from the last places in the TOP-500 in terms of capitalization, and even enter the TOP-20.
Interesting to note, at that time the cryptocurrency market was in stagnation. Bitcoin even tested a support zone, falling below $6,000. So why would people invest heavily in such an unattractive project?
There was almost no information about this coin, not to mention the interest from crypto investors. The latter is confirmed by an almost perfectly flat schedule for 2017 – even during the period of a powerful surge in the cryptocurrency market since the spring 2017, no one cared about E-Coin.
This is a good example of a two-wave pump.
The project itself is of little interest to anyone. It was supposed to be another analogue of Bitcoin, but investors quickly forgot it, as evidenced by the price chart. Growth in January 2018 is not a pump.
This is not quite a pump, but this example is worth mentioning – the nature of the chart and the psychology of traders are identical here.
This unknown cryptocurrency appeared less than a month ago, and, as it often happens with startups, at first it actively grew (scalpers’ attempt to capitalize on the hype around a new project). Then the price collapsed, and the second wave of the pump followed. Usually, after the first recession, the project is no longer interesting to anyone. Here we can say for sure: someone (most likely developers) implemented the Pump & Dump tactics. After the second wave, the value of the coin went down, achieving a lower price — that was quite predictable.
4. The power of Elon Musk’s words
Elon Musk has repeatedly proven his influence on the cryptocurrency market. But if the local price shifts of the BTC or DOGE are more of a fundamental reaction to Musk’s announcement regarding these coins, the following examples cannot be explained otherwise than by a “pump”.
- Santa Floki (HOHOHO). At the end of December 2021, Elon Musk twitted a selfie with his puppy named Floki, whom he dressed up in a New Year’s costume. It is difficult to say how users were able to associate HOHOHO with this fact, but the cryptocurrency worth 0.00000065 USD grew by more than 5,000% in a few hours. And it collapsed just as quickly. A few months later, the project was completely removed from the listing, but someone managed to make good money on it. This was one of the great examples of the crypto “pump and dumps” incidents.
It is worth noting that Elon Musk’s puppy acted as ‘a pump driver’ several times. In September 2021, his mere appearance in the family of a billionaire led to a spontaneous cryptocurrency pump of 1,300% of the Shiba Floki (FLOKI) coin. The name of the puppy was invented back in July, so it is unlikely that such a rapid increase in the coin’s price of a coin with a rating below 2000 could be associated with Musk’s desire to make money.
- VikingsChain, Viking Swap and Space Vikings are also notorious examples of cryptocurrency pump and dumps. In early November 2021, these coins went up by about 350%, 3,700% and 600% respectively after Musk posted several tweets about the Moon and the Vikings. Elon suggested that the Vikings were the first to land on the moon. Did he relate to these coins? There’s no evidence of that. However, the coins, which are in no way connected with either the Moon or the Mask, have risen sharply at a much higher price than ever expected.
Do not confuse the crypto Pump & Dumps incidents with natural volatility. Let’s observe the example of the TRON cryptocurrency for you to see the difference.
At first glance, we see a pronounced pump here, but it is not. Please note: the coin is in the TOP-20 in terms of capitalization. To pump such a token, that is, to influence the cryptocurrency rate, you need a lot of money, and institutional investors (“whales” – cryptocurrency exchanges, mining pools) work according to completely different schemes.
And the second point: the growth of the coin coincided with the uptrend on the entire cryptocurrency market, the capitalization of which in early January exceeded $850 billion.
Below, there’s one more example of how price spikes after the statements of famous people, but it’s a rather natural growth than a pump.
At the end of October 2021, Mark Zuckerberg announced the rebranding of Facebook Corporation to Meta with a corresponding change in the company’s development strategy. The Metaverse segment was chosen as the main goal: they started building a metaverse based on virtual and augmented reality technologies.
Similar startups of a smaller scale already exist, especially in the cryptocurrency world. Crypto mataverse users buy and sell virtual land linked to NFT tokens and even issue mortgages for such lots. It is logical that some metaverse-related free coins immediately gained value and grew in price: Decentraland (MANA), Sandbox (SAND), Metaverse Miner (META), Metaverse (ESP), and MetaverseX.
Compare the two charts. MANA:
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