In a nutshell, a pump and dump is an excessive increase (pump) and decrease (dump) in asset prices in investment instruments such as cryptocurrencies, stocks and derivatives. In essence, it is a set of transactions designed to deceive investors. In this article, we will be answering the question of what is pump and dump in cryptocurrency.
What are Pump and Dump in Cryptocurrency?
Pump is a rapid increase in the value of a cryptocurrency. Dump is a rapid decrease in the value of a cryptocurrency. These two actions are linked and are carried out one after the other. In fact, pump and dump is a planned action by a team of people to make money by deceiving investors. It is usually initiated through messages disseminated through major channels. The main theme of these messages is “This coin will rise.” The working logic of pump and dump operations is quite simple, but it is a powerful action in terms of victimizing many people. Pump and dump is simply the abuse of investors’ emotions about making money.
Although the cryptocurrency sector is popular, new investors continue to enter this world every day. Pump and dump transactions, which are carried out every second at every moment, cause many people to be victimized due to investors’ lack of knowledge or desire to make money quickly. Now that we have a brief overview of what pump and dump are, we can look behind the scenes of this deceptive fiction.
How to Perform Pump and Dump?
Pump and dump is usually carried out by a group of manipulators or a coordinated effort by many investors. The step-by-step process of this process is as follows.
Step 1: Goal Setting
Manipulators first identify the cryptocurrency to pump and dump. Usually altcoins with low liquidity or low volume are targeted.
Step 2: Investing
Manipulators invest large sums of money in the cryptocurrency they will pump and dump. This move by manipulators aims to create enough liquidity to artificially inflate the price.
Step 3: Hype and Promotion
Manipulators promote the targeted cryptocurrency and try to influence investors through tools such as social media, private groups or messaging apps. Their rhetoric is usually positive and promises high returns, such as “This altcoin has great potential” or “This altcoin is going to make a big splash soon”. Their goal is to spread these messages as far as possible and encourage other investors to invest in the asset.
Step 4: Price Increase
As a result of the manipulators’ investments and hype campaign, the price of the targeted cryptocurrency starts to rise rapidly. Accordingly, other investors rush to invest in the asset in the hope of earning high returns.
Step 5: Victory and Frustration
When the manipulators think the price has reached their desired level, they start selling their cryptocurrency. This is their stage of profit, their victory. The price then falls rapidly and other investors suffer financial losses. This is the stage where the hopes of the original investors for high returns end in disappointment.
Which Cryptocurrency is Pump and Dump Performed on?
It would not be right to directly target a cryptocurrency. But this question can be answered in general terms. Less popular cryptocurrencies with low liquidity and volume are more susceptible to manipulation and can be more easily controlled by manipulators. For example, large cryptocurrencies like Bitcoin are more resistant to manipulation because they have a larger investor base and higher trading volume.
Most pump and dump traders target cryptocurrencies with low market capitalization, newly launched cryptocurrencies, or cryptocurrencies with low public float. Because such cryptocurrencies can be moved up or down more easily.
Engaging in or becoming involved in such activities can expose investors to serious financial losses and legal problems. It is therefore important to act with sound investment strategies and avoid the risks of manipulation.
Where Does Pump and Dump News Spread?
Pump and dump news is often spread through various platforms and channels. To avoid such actions, it is important to know these channels. Some important channels that have the potential to spread pump and dump news are as follows.
Social Media:
Social media platforms play an important role in the spread of pump and dump news. Twitter, Instagram, Telegram, Reddit and other social media platforms are common channels for cryptocurrency communities and groups to communicate and share information. On these platforms, some groups or individuals may announce or discuss pump and dump activities.
Messaging Apps:
Pump and dump news can also spread through private groups and messaging apps. For example, Telegram or Whatsapp cryptocurrency groups or private groups on platforms like Discord can be used to plan and publicize manipulation activities. Since such groups often have limited reach, they can be used to prevent news from reaching the general market earlier.
Media Sites:
Cryptocurrency news sites and blogs provide news and analysis about cryptocurrency markets. Such platforms may announce pump and dump news or publish articles about such activities.
Forums
Forums where cryptocurrency communities are active can contribute to the spread of pump and dump news. These forums can be places where users share information about cryptocurrencies and can be positioned to discuss potential pump and dump activities.
Can You Make Money from Pump and Dump Trading?
For some manipulators, pump and dump trades are manipulative activities carried out for profit-making purposes. Manipulators who can enter and exit trades early are likely to achieve high returns in a short period of time.
Manipulators
Manipulators who initiate and plan pump and dump trades can profit by artificially inflating the price and then selling. However, these are often people who work in groups and have early access to information. It is therefore difficult for general investors to profit from manipulation activities.
Early Entrants
In the early stages of the pump and dump process, early-entry traders who see the price of the targeted asset rising rapidly may have a chance to profit. However, it is quite difficult to make a profit at this stage. Because when manipulators usually start making their first sales, it becomes difficult for general investors to access the price.
Risks and Losses:
Pump and dump operations are extremely risky and controlled by manipulators. Once the manipulation ends, prices fall rapidly and most investors face losses. Manipulators act to profit at the expense of other investors. Therefore, it is a safer approach for general traders to stay away from pump and dump trades.
Pump and dump operations are fundamentally manipulative and illegal. It can also be pursued by regulatory agencies and can have serious legal consequences. Participation in or involvement in such activities can lead to financial losses, loss of credibility and legal problems.
What Can Be Done to Avoid the Danger of Pump and Dump?
There are methods that can be applied to avoid the danger of pump and dump and to avoid financial damage. By paying attention to the following topics, such manipulative transactions can be avoided.
To FOMO (Fear of Missing Out) Caution Should Be Taken
When the price of a coin rises, investors can develop a sense of “FOMO”, or the fear of being left out. Pump and dump organizers encourage investors to invest in the coin by telling them that they will miss out on the profits they could make if they don’t invest in the coin. So this FOMO feeling should be blocked. It may be more profitable to make investments based on logic rather than emotion.
Against Pump and Dump Risk Research and Fundamental Analysis:
Before investing, detailed research can be done to understand the underlying fundamentals of the project or cryptocurrency. You can learn about the technological basis of the project, the team, the partners and the developments realized. Fundamental analysis can be a useful way to assess the long-term potential of the project.
Against Pump and Dump Risk Reliable Sources Should Be Preferred:
When following news and analysis, it is worthwhile to turn to reliable sources. Sources such as well-known crypto media sites, well-known analysts and official announcements of official projects can provide more accurate and reliable information.
Focus on Highly Liquid Assets:
Investing in more liquid and high-volume cryptocurrencies helps to be more resistant to manipulation. Large and liquid cryptocurrencies like Bitcoin are less vulnerable to manipulation.
Be Attentive to Messages and Assess Risks:
Caution should be exercised when confronted with hype or messages promising high returns. Rather than making hasty decisions, it is necessary to assess potential risks and the possibility of manipulation. It is important to remember that the prospect of quick returns can come with great risks.
Against Pump and Dump Risk Research should be done:
Projects and assets should be independently investigated. Research should also be carried out individually and decisions made on the basis of this, not just relying on the advice of others or the rhetoric of groups.
Investment Strategies Should be Implemented:
It is much safer to invest based on strong principles such as fundamental analysis, technical analysis and risk management. Focusing on the fundamentals and long-term potential of the project, rather than short-term manipulative activities, can be more productive in terms of investment.
To summarize, pump and dump are common manipulative activities in the cryptocurrency market. This type of activity takes place in cryptocurrencies with low volume or low liquidity and is based on manipulators artificially inflating the price of the targeted asset and then selling it quickly.
However, pump and dump trades carry serious risks for traders. Manipulators profit from investors who enter early, while other investors can suffer huge financial losses. Investments built on solid foundations and decisions based on reliable information will always be more sustainable on the road to success.
