Crypto Pump and Dump Concept and How to Avoid Possible Scams
As there are so many benefits in crypto likewise there are downsides. The phrase ‘pump and dump’ can be a blessing as it is a curse. It is all subject to time and price. There is a high probability that an experienced crypto trader would have come across this phrase. However, it is important to quickly understand the concept of this phrase as a newbie to avoid future losses and possible scams.
What is the meaning of pump and dump?
Pump and Dump are when a group of people or investors find an asset (crypto asset) with a low market capitalization, then invest heavily in such asset to make it more attractive to the public. After a series of implied advertising to convince the public or masses to buy. They pull out their initial investments and the profits accumulated from the price increase. While they reap excessive profit, the convinced buyers will be at a great loss.
It was stated earlier that it can be a blessing and a curse. If someone gets in at a low entry price and was able to sell off when the coin starts pumping. Then it’s a blessing.
On the other hand, if someone gets in when the coin is already pumped and the big whales or investors have removed their investment plus profit before getting out of the trade. Then it’s a huge loss.
The Pump and Dump Process
How exactly do the pump and dump happen? How exactly does this campaign work?
The four stages that ensure a successful pump and dump campaign are:
- Market Research
- Aggressive Investment
- Deceitful Marketing
- Pulling Out
This is the first stage of the pump and dump process. Just like every other crypto enthusiast, pump and dump hawks research extensively to find tokens with low market capitalization.
Market cap (short form for market capitalization) is the overall worth of an asset in dollars. It is calculated by multiplying the current price of a token by the total of units available.
These hawks are always on the lookout for assets with ridiculously low prices in the market. When they find suitable coins that match their intentions, they move on to the other stages.
Another thing that some of them do is to create their native tokens on a blockchain network. When they successfully create their tokens, the next stage is what will be done next.
After finding a low market-cap coin or creating one, the next thing these hawks do is to start investing aggressively. They pump in hundreds and thousands and even millions of dollars. For clarity’s sake, pump in means buying.
This act would finally result in a gradual increase in the coin price.
This is the stage where investors or crypto traders are fooled into buying this particular coin or token. All manner of tactics would be used to portray such a coin as a good investment.
Marketing tactics include acting as the everyday trader who has found a goldmine in such a token. They also join all sorts of telegram groups and social media channels to make sure that enough word is spread.
At this stage, it is very easy for people to buy into this project with the hope of making money from it.
Pulling Out of invested Funds plus profit
When a lot of people have invested in this token. The market cap would have gotten higher and the value of the crypto would have pumped exponentially.
At this stage, these pump and dump hawks pull out all their invested funds plus massive profits leaving others in great losses.
How to recognize and avoid losses on pump and dump projects
There is no easier way to recognize these types of coins than when projects that have never been heard of suddenly gain media attention. Pump and dump projects have the best marketing and advertising skills.
Also, their projects have no real use-cases in the real world. Their whitepapers have no real substance and one could easily tell that these projects are only good on the surface.
Another distinct feature of these projects is that their quantities are usually in trillions or quadrillions without any plans of burning or curbing the excessive supply.
A good way to protect yourself from this type of situation is by making sure that each coin has been verified on reputable exchanges, Coinmarketcap, and Coingecko.
Also taking time to read about the project, its use-cases in real life, partners, and long-term goals are important ways of securing oneself from pump and dump schemes.
The truth is that people will keep falling victim to these pump and dump tokens. The cryptocurrency market is highly volatile and this is one of the risks that showcase. Being informed and staying properly guarded against these hawk schemes can only be done through proper research.