The cryptocurrency market has appeared quite recently and continues to adopt individual components of classical financial institutions. Digital assets are increasingly compared to the stock market due to many similarities. Indeed, most of the trading and investment strategies that work on the fund apply to the crypto market.
Today we will talk about one of these strategies. It’s called a crypto pump and dump. We will try to fully reveal the very concept, essence, and methods of applying the strategy, as well as its especially negative impact on the cryptocurrency market. Well, let’s start! What is a pump and dump crypto in the usual sense? In simple terms, this is a real manipulation raised to the absolute.
How does a cryptocurrency pump-dump work?
Consider a specific example, albeit unrealistic. Pump and dump Bitcoin. There are a certain number of people united by the nickname Satoshi Nakamoto. They have a project called Bitcoin that they want to make a quick buck on. To do this, they artificially pump up the asset with pre-prepared volumes of “investments”, after which investors, delighted with the success of bitcoin, begin to invest real liquidity in the asset. Thus, the first part of the insidious plan called “pump” takes place.
Visualization of pump and dump/ photo: polygant
Participants of Satoshi Nakamoto saw that the asset rose to $60k and the price is unlikely to go further. In other words, the real investment potential that arose as a result of the artificial infusion of funds has dried up. And at this stage, all members of the Satoshi Nakamoto group begin to sell their coin holdings while the price is at its maximum. Thus, the craftsmen fix the profit or produce the second part of the insidious plan called “dump”. This is how the bitcoin pump and dump happened and this is how this procedure goes in relation to any other cryptocurrency.
In classical markets, this procedure was carried out regularly, especially during difficult economic situations and greedy liquidity providers. However, subsequently, the procedure was brought under legislative regulation and its use was significantly reduced. Pump and dump in the cryptocurrency market concerning new projects is a very common practice due to the lack of government regulation and protection of investor rights. This is a very risky thing, so if you are a novice investor or you are underage, then it is better to learn how to buy crypto if you are under 18 and forget about the pump dump procedure.
Types of “pump-dump” tactics
There are two types of artificially inflating the price of a token to get rich quickly. Short-term pump and dump target retail traders who are in the market at the current time. This is because a short-term dump and pump takes from several minutes to several hours, but not longer. The task of pampers is to create instant excitement under the guise of a certain event. On average, for a short-term pump, the organizers need about 40-70 BTC, depending on the calculation of the expected profit.
A long-term pump and dump last for several days. Usually, digital assets from the top thirty top by capitalization are used for this. Usually, pumping and dumping such large projects requires a large audience and investment infusions. The most famous pumper in the cryptocurrency environment is Elon Musk, who, at every opportunity, tweets something about the DOGE coin, and the asset price immediately soars by 10% -15%. In this case, investment trust in the entrepreneur and large audience work.
There is another example where the main role was played by the investments in the project itself. We are talking about the Cardano token, which received a huge boost in August 2021. During the month, the asset grew from $0.9 to $3.1 and secured its place in the top five projects by capitalization. Subsequently, the project failed to fully realize its long-term plans. Despite this, the pump can be considered successful, as Cardano has established itself in the top 10 crypto assets by capitalization and is successfully creating its ecosystem.
Cardano pump in August 2021/ photo: TradingView
How to identify pump and dump?
So how do you recognize the cryptocurrency pump and dump procedure and not fall for its hook? The first red flag during this procedure should be unreasonably high market activity. We are talking about sharp bullish signals on cryptocurrency technical indicators, large buy orders, and a general increase in trading volumes. That’s sorted out, but what does “unreasonable” mean? This means that the sharp growth of the project was not the result of some positive news, such as the conclusion of cooperation with a large investor. If the project took from nowhere and suddenly grew, then you have a pump-dump procedure in front of you.
It is very difficult to make money on a pump dump since the main volumes of investments are in the hands of the organizers. Only a narrow circle of people knows when to sell stocks and take profits. Usually, profit-taking goes through one wallet and other investors simply do not have time to react. Investors would not have had a chance if at one moment our familiar team of Satoshi Nakamoto took and sold 2 million coins out of 5 million BTC. And other investors would hardly have had time to take advantage of the opportunity to fix at least some part of the profit.
But you need to understand that if the project is large, then there is a chance that after the pump there will be no dump. In this case, you have a project that is trying to attract new investors with the help of pump prices. Cardano did not fully meet the expectations of short-term investors, but it cannot be said that the project is a scam.
Therefore, if you accidentally stumbled upon a “promising” project that is growing in price before your eyes, then most likely this is a local cunning action of a narrow circle of people. And in order not to become part of someone else’s enrichment scheme, it is better to bypass such projects. The main weakness of pump-dump projects is a weak information base. Therefore, try to find out as much as possible about the project, its partners, and the team before making investment decisions. Even in such a volatile market as cryptocurrency, token prices do not fall by 80% in an hour. Be careful and choose investment projects wisely.