Pumps & Dumps: What to Watch Out For
Cryptocurrency is the most recent craze in town. Over the past year, and particularly in the last six months, a lot of people have been trying to get a piece of the pie. The general sermon is to invest a little and watch it bloom in the next few months or years.
But let’s set the records straight, if you are entirely new, there is every chance you fall victim to pumps and dumps. Go to YouTube, and see people hyping tons of crappy coins. Make no mistake to buy without first researching, because you may be in for a swell ride. So, what is a “pump and dump”, and how can you spot them?
What is a Pump & Dump?
As at the time of writing this article, the top 20 cryptocurrencies are struggling to recover from weeks of downward prices. Interestingly, we have coins like “Greencoin, Crypto, and Blakecoin” enjoying price increases of 816%, 233%, and 216% respectively, in the space of 24 hours. Check back in 2 days, and you will discover that these coins have lost their value. This is a sign of pumped coins.
“Pump” refers to rapidly inflating the price of a coin by an investor or group of investors, with the aim of making quick gains out of the market. And thereafter, exiting by selling off in a “dump” action, forcing the prices down.
Bonus Tip #1: Pump and dump are scams and illegal. It is unethical to engage in them.
Here’s how pump and dump works. There are always two parties involved in every pump and dump action/scam – those who gain, and those who lose. A crypto player with deep pockets or group of players can come together and buy up significant amounts of a token, let’s call it “XYZ”.
XYZ can be easily manipulated because it has a small market cap, and a relatively low circulating supply. Pumpers capitalize on this fact and decide to buy XYZ en masse. The sudden increase in price attracts external investors who buy in, further pushing the price up. Smaller and inexperienced investors also FOMO in (and their end is hardly profitable).
Once the pump action is done, these group of pumpers start exiting the market in a coordinated way, thus forcing the price down, and leaving you inexperience trader with worthless tokens.
Really, it’s a wild west out there, and there are some known high profile pumpers like Ryan, Fontas, and even John McAfee. So, what should you be looking out for?
Bonus Tip #2: Even major coins sometimes get pumped. It is therefore necessary to researched a project before getting in. If it’s been pumped, take profits and get back in when the market is stable.
Spotting Pump & Dump
Watch out for the following:
- Low market cap and low trade-volume cryptocurrencies suddenly breaking out without news or warning.
- Large buy and sell walls suddenly appearing and disappearing is a red flag.
- Pump and dump thrives on fake news. Always visit the official website and media handles of these cryptos.