One prevalent manipulation scheme is the “pump and dump,” regarded as one of the most detrimental forms of market manipulation. So, what exactly is a pump and dump?
When trading or investing in cryptocurrencies, careful consideration of various factors is essential before making decisions. While traders typically analyse market conditions, historical price movements, chart patterns, indicators, and other relevant information, there are instances when quick decision-making becomes necessary due to the volatile nature of crypto markets, characterized by sudden and unexpected price fluctuations.
However, this volatility and growing interest in cryptocurrencies have led to market manipulation by wealthy individuals seeking to exploit favourable conditions for their own gain. One prevalent manipulation scheme is the “pump and dump,” regarded as one of the most detrimental forms of market manipulation. So, what exactly is a pump and dump?
Understanding pump and dump in crypto
A pump and dump refers to a market manipulation scheme that creates a false market narrative, artificially inflating prices. As the name suggests, the scheme involves two stages. The first stage, known as the “pump,” revolves around creating a false narrative, disseminating misleading information, or employing other tactics to convince others to invest in a particular cryptocurrency. Before initiating the pump, the orchestrators typically accumulate significant amounts of the targeted cryptocurrency at a low price. Once the false narrative gains traction and people begin buying the token, prices start to rise rapidly. As prices surge, more individuals are lured into buying the cryptocurrency, anticipating quick profits.
However, once the price reaches a predetermined threshold, the “dump” stage commences. Those behind the pump-and-dump scheme, having acquired the cryptocurrency at a low cost, begin selling their holdings using take-profit orders to secure substantial profits. As many individuals rush to sell their holdings, the increased selling pressure leads to a sharp decline in prices. This sudden fall prompts others to sell, exacerbating the downward price spiral. Within minutes, the cryptocurrency may lose all the gains accumulated over weeks. As the fall occurs rapidly, the majority of those who bought the token during the pumping period are unable to sell for profit, resulting in significant losses, particularly for late buyers.
How to spot a Pump and Dump
Detecting pump and dumps requires vigilance, as not all price spikes indicate market manipulation. However, there are ways to identify potential pump and dump schemes. Firstly, examine the sharpness of the price increase. If the spike is a vertical line, indicating a rapid surge, investigate the reasons behind it. Check social media platforms and gauge what people are saying. If conflicting or unsubstantiated information is found, it is likely a pump-and-dump scheme. Even if there seems to be a plausible reason, the probability of a price drop following such a sharp rise is high, as early buyers begin selling for profits. Therefore, it is advisable to exercise caution and avoid purchasing cryptocurrencies that experience extremely rapid price surges. If you choose to invest, consider implementing take-profit and stop-loss orders to limit potential losses.
In conclusion, pump-and-dump schemes are detrimental market manipulation tactics prevalent in the crypto industry. Recognizing the signs of a pump and dump can help traders avoid potential losses. It is crucial to conduct thorough research, exercise caution, and be mindful of rapid price surges to navigate the crypto market effectively.
FAQs on pump and dump
Is pump and dump in crypto illegal?
Pump and dump schemes in crypto are considered market manipulation, which is illegal. However, due to the relatively unregulated nature of cryptocurrencies, some individuals manage to evade legal repercussions and profit substantially.
Is Dogecoin a pump and dump?
While Dogecoin can be categorized as a pump and dump, its status as a meme token also contributed to its rapid rise and fall. Elon Musk’s tweets about Dogecoin triggered a wave of purchases initially intended as a joke, but the situation quickly escalated, resulting in pump-and-dump-style price movements.
