Whenever you are trading or investing in cryptocurrencies there are many different things that need to be taken into account before making a decision. While you might plan your trade or investment by taking a look at the market, looking at past historical price movements, looking at chart patterns and indicators, and other relevant information, there are times when you will have to make trades on a moment’s notice. Because crypto is very volatile, big price movements happen quite often and without warning.
But due to this volatility and a growing interest in this field, there are times when the market is being manipulated by a few very wealthy individuals, who help to create fall market conditions in order to score big. One of these strategies is called a “pump and dump”, and this is one of the worst market manipulation schemes out there. But what is a pump and dump exactly?
What is Pump and Dump in Crypto
Pump and dump is a crypto market manipulation scheme that creates a false narrative of the market and creates artificial prices. You might have guessed from the name how this scheme works, but for those that did not, here is how it works. The first part is called the pump, here people create a false narrative, give out false information, or try different means to make others believe that this cryptocurrency is going to grow a lot and it is good to buy it right now. But before this is done, the people behind this pump and dump, usually buy a lot of these cryptocurrencies at a low price. Then, once this false narrative takes effect and people start to buy into this token, the prices start to go up. During this period, as prices are going up, more and more people are buying this token as they see that the price is growing very quickly. But once the price reaches a certain point, the dump period begins. As we mentioned, people who started this false narrative have bought this cryptocurrency for cheap, and once they see that the price has reached a very high level, they start to sell all of their cryptocurrencies using take-profit orders to take out very huge profits. Since a lot of people are buying this crypto, the sell orders for these people get filled very quickly, which creates a sharp fall in prices. Once people see that prices started to fall they also start to sell, which drops prices even further, and in just 5 minutes the crypto might have lost all the gains it had made over weeks. Since this fall happens so fast, the majority of people who bought this token are late to sell it for profit and when the price falls they are left with pretty big losses, especially those that bought this crypto at the end of the pumping period.
How to spot a Pump and Dump
Well, whenever the price of cryptocurrency jumps, it might not always be pump and dump, so investing, in that case, might be a good idea. Because of this, there is one question that many people have, which is, how can we spot a pump and dump?
It is relatively easy to spot pump and dumps. The first thing that you need to do is to see how sharply the prices have gone up. If it is a very fast spike, like a long vertical line, the first thing you need to do is look into why this happened. Check social media platforms and what people are saying. If you see that people are saying different things, and there is no clear and confirmable reason for this rise, it is most likely a pump and dump scheme. Even if there is some reason, the likelihood of the price dropping after this kind of sharp rise is very high, as most people who bought it early will start selling for profits. So our suggestion is that, if you don’t want to take a big risk, never buy crypto that goes up so fast, or if you buy it, always have take-profit and stop-loss orders in place, to at least limit your potential losses.
FAQs on Pump and Dump
Is a Pump and Dump in crypto illegal?
Crypto pump and dump schemes can be classified as market manipulation which is certainly illegal. But considering that cryptocurrencies are not strictly regulated, there are people who avoid being charged and get away with making very big profits.
Is Dogecoin a Pump and Dump
Dogecoin can be classified as pump and dump, but being a meme token also played a part in its fast rise and fall. When Elon Musk tweeted about this token, most people started to buy it as a joke, but things got out of hand pretty quickly, creating a pump and dump style price movement.