How Cryptocurrency Pumps and Dumps Works

How Cryptocurrency Pumps and Dumps Works

In the world of cryptocurrency, pumps and dumps are one of the biggest scams in the industry, but they are also one of the quickest ways to make a profit. It also is one of the biggest dangers to newbie cryptocurrency investors in the market. Although many traders aren’t quite conversant with this, it is safe to say it’s one of the most successful scams that many new investors fall for repeatedly.

What is a pump and dump scheme?

A pump and dump is the process where you buy an asset (usually one with a low market cap), and to dump the asset at a higher valuation; you promote it to other unsuspecting investors. In most cases, inexperienced traders are fooled into going along with their scam with the promise of huge returns. The promoter’s deal earns him a quick profit. However, those people who were tricked into purchasing the asset by the promoter are left counting losses.

According to a report in 2018 by Wall Street Journal provides an inside look at the operations of pump and dump schemes. It states that crypto pump-and-dump programs accounted for $825 million on trading activity in six months and “hundreds of millions of dollars on losses.”

In many cases, these scammers operate on social media platforms like Discord and Telegram, building legitimate cryptocurrency project channels for victims for their pump and dump schemes.

How do they work?

Pump and dump scams involve two sets of people.

1. The players. Their work here is to increase the price of a coin by endorsing or promoting it. These people spent minutes, hours, or even days purchasing up cheap coins.
2. The innocent newbies. (Sometimes even more experienced traders get caught) they will be dumped.

Coins value increases, and the trading volume goes up as buzz around the coin gains momentum. It makes you both the pump and dumper. After the players sell all their coins once the coin hits the desired price, people start to panic sell, hence dumping their coins on the market and sensing the price dropping.

A coin primed for a pump and dump is not too difficult to detect, and there are ways to know when a pump or dump might be incoming. There will often be purchasing patterns on a graph each time the players purchase, loading up on the cheap coins without drawing too much attention.

The players will talk up their coins of choice on the forums and chat boxes after they have bought the coins. The talk ups will go on until there is a buzz, and people begin purchasing. It is the period when the pumping happens. Once the chatter picks up on trading platforms, people start buying the coin and pumping the price up, which fuels the buzz even further, and more people start buying.

Some players will begin selling off their coins once the coin hits a high point – this signals the dumping process is about to start. This process can happen in a matter of a couple of seconds or over a few hours. Here, the players will sell small amounts of coins as quickly as they can without dragging the price down until they are out. Once the players are out – this is when the dumping process happens – a panic sell starts. The volume is down, and the price is no longer climbing. Panic sellers now start realizing that their sell orders aren’t getting filled, and they will sell below the market value to get out. It can lead to the coin’s value plummeting drastically.

As much as players are the ones becoming rich because they have the capital and knowledge, that doesn’t mean you have to lose out every time. You can buy cheap coins for a coin prepped for a pump and dump, and if you’ve spotted the signs early, it shouldn’t be hard to make a decent profit in 5 minutes.

Also, if you come late to the party and the coin has started being pumped, you can still make a profit but in the early stages. Although your benefit will be smaller and your risk higher, you should be able to expect a good return if you enter and exit the market fast.

Beware of FOMO

A pump and dump are typically recognizable through the way it’s advertised. Advertisements on social media promote the event by basically promising instant profit. This analogy seems too good to be true because, more often than not, it is.

A good example is when Bitcoin first went mainstream, and it soared to a record high in 2017. Many were left feeling as though they had missed out. It is ‘FOMO’ – the fear of missing out, or the fear of missing opportunity. Pump and dumps will give enticing reasoning for the event and attract individuals who fear missing out on the reward.

To avoid not being a victim of a pump and dump scheme, one shouldn’t give in to feelings of FOMO. Investment decisions need to be backed by market research and an understanding of ongoing trends.

Are pump and dump schemes illegal in crypto?

Pumps and dumps schemes are highly regulated in traditional financial markets. What makes insider trading a severe offense is that it makes the market unfair to those who don’t know what has been distributed by the pump and dump orchestrators.

So, nope! Cryptocurrency is still mostly unregulated, and since the SEC does not class Etherium-like cryptocurrencies as a security, that means anything goes.

Do pump and dump bots work?

It’s not as easy as most investors think that trading bots do work in the sense that they trade for you. As much as the software automates tasks for you, you still need to be familiar with trading strategies. It’s unlikely that a bot will make you any money if you don’t have any experience or success with trading on your own.

Bottom line

You have to have quick reflexes, automation, and a little luck to make more than what most traders do in a month. Before you put your trust in pumps and dumps schemes, we encourage you to do thorough research on it. Otherwise, you can never be sure what’s going on.