Cryptocurrency pump and dump definition - how does it work?
One of the biggest dangers to newbie cryptocurrency investors is the pump and dump. While many traders don’t even know what this is, suffice to say it’s one of the most successful scams that many new investors fall for repeatedly.
Chasing riches leads to bad decisions, and in this article, we’re going to explain exactly what a cryptocurrency pump and dump is and why you should avoid them at all costs! Are pump and dumps illegal? Keep reading to find out, and learn what to look out for to protect yourself from these schemes.
What is a pump and dump?
A pump and dump is when a group of investors colludes to run up the price of an asset. In most cases, they will actually dupe inexperienced traders into going along with their scam with the promise of huge returns. Unfortunately, these naive people often find out too late that this is a good way to walk away with huge losses.
What is a pump and dump in regards to cryptocurrency?
Cryptocurrency is largely unregulated still, and this means that these “investor groups” can often get away with this activity much easier than they would in traditional financial markets. The crypto niche is filled with small market cap coins and projects, which can be easily manipulated by these groups.
Many times these scammers operate on social media sites like Discord or Twitter, trolling legitimate cryptocurrency project channels for victims for their schemes. That’s not to say that you can’t get taken in larger markets as well, it’s just easier in smaller markets where controlling the supply is cheap.
How does a cryptocurrency pump and dump work?
A crypto pump and dump works by convincing naive investors that they are being given the opportunity to get rich quick. The fear of missing out is a powerful thing, and in many cases, these people convince themselves that this is a real investment opportunity.
The “investor group” or whales will convince these traders who they have just let in on their “secret” to purchase and drive up the price of a certain cryptocurrency asset. This is usually an asset with an extremely small market cap because that makes it easier to control the price and manipulate. When trading volume is low, it takes only a small amount of buying power to inflate the price beyond reasonable levels.
Unfortunately, unbeknownst to these victims, the investor group has already been slowly acquiring these coins, potentially even over the course of several weeks while the prices were very low.
The new investors drive up the price trying to accumulate when the pump and dump group tells them to buy, and then the players who are in the know sell all of their bags and dump the price on the newbies. This leaves the new investors with severe losses, usually in a dormant asset they will never be able to sell to recoup their loss.
What’s an example of a pump and dump?
Jimmy hears a rumor that a certain crypto coin is about to go to the moon from a scammer on Twitter or Discord; common hunting grounds for pump and dump groups. He sees that the price has already increased, and due to a fear of missing out on profits he begins frantically buying the coin.
Other investors have already been doing the same, and now the orchestrators of the scam know it’s time to dump their bags. They all exit their positions, crashing the market once they are in the clear. The value of the assets dumps and Jimmy is left with significant losses he can never recoup. The crypto pump and dump group takes its profit and moves on to the next coin.
Why are pump and dump schemes illegal?
In traditional financial markets, this type of activity is heavily regulated. Insider trading is a serious offense because it makes the markets unfair to those who are not privy to information such as what has been distributed by the pump and dump orchestrators.
In the United States trading activity such as this can carry hefty prison sentences and fines if these people are caught. These regulations were put in place to protect casual investors who are often the ones that are hurt by these scams.
Can you make money from the crypto pump and dumps?
It is possible, but it’s also pretty dangerous. If you were to see an asset quickly increasing in volume, then you could try to take advantage of the opportunity. However, it’s easy to get greedy and find yourself left holding the bag. If you’re planning to try chasing these pumps, then do so using only a small portion of your portfolio or you’re likely to have a very bad day.
If you are planning to get in with an “investor group” in order to profit off cryptocurrency pump and dump schemes, then it’s very likely that the only thing you will get out of it is becoming another victim. Not to mention the fact that you open yourself up to some serious legal consequences if anyone finds out about these activities.
Can you pump and dump cryptocurrencies yourself?
Unless you have a lot of money it’d likely be pretty difficult to do this. Being able to organize a pump and dump typically requires a good deal of capital and roping other people into taking the fall so you can make a quick buck. It’d be pretty difficult to do this all by yourself.
Do pump and dump bots work?
While trading bots do work in the sense that they trade for you, it’s not exactly as easy as most investors think. The software simply automates tasks for you. You, as the investor, still need to be familiar with trading strategies.
You need to tell the software what to do for you, and if you don’t have any experience or success with trading on your own, then it’s unlikely that a bot will make you any money.