Pump and Dump in the cryptocurrency market: “swings” that make some millionaires and others bankrupt
Investors earn income in the cryptocurrency market in different ways. Some of them fill the portfolio with reliable assets and wait patiently for several years until their value rises sharply. Others “catch” fluctuations with the help of technical analysis and profit from price differences during the day or week. But there are also people who do not follow the price, but artificially set it. This strategy is called Pump and Dump. Let’s talk about it in more detail.
The essence of the strategy
Features of Pump and Dump technology are clear from the name. Translated from English, the term Pump means “pumping”. That is, the artificial creation of a stir or an increase in prices in relation to the stock or crypto currency market. In Russian, such a term has even taken root – “pampit”.
Accordingly, Dump is the opposite action. That is, the activity of market participants aimed at reducing the value of an asset. “Dumping” the price means artificially lowering it for various purposes.
Schematically, this process looks like this:
- On sites on the Internet or in groups on social networks, information is posted that you can participate in making money. Allegedly, someone has data on an increase in the price of an asset in the near future. So, you need to buy this asset.
- As the demand for a certain asset grows, its price naturally increases as well. That is, at first glance, the information is confirmed. Therefore, more and more people are involved in the process.
- As a result, the asset “pumps up”, and the price reaches a peak. But since the growth in value is due only to artificial reasons, at a certain stage the “inflated” asset bursts and the price will fall.
It would seem that the situation is beneficial for the participants. After all, you can buy crypto at a low price and sell it at the peak. In fact, the organizers of this whole “action” make the purchase of “junk” coins even earlier. And they also sell it earlier than the rest. It is this stuffing that initiates the fall.
In other words, the organizers of the “swing” enjoy the trust of naive users and “take away” this money from them. Therefore, such a strategy of working on the stock, cryptocurrency and other financial markets is considered illegal.
Why the price of crypto can be “rocked”
The cryptocurrency market differs from the stock market by greater volatility. That is, for investors, strong fluctuations in the price of an asset are not news. This is due to the fact that the crypt is not backed by tangible assets. Consequently, the value in the market is formed only by the balance of supply and demand, as well as liquidity.
Only weak and little-known coins with low capitalization can be artificially “swinged”. If such technology is applied to ether or bitcoin, huge efforts and funds will be required for the buildup. But even in this case, the effectiveness of such measures is doubtful.
That is why most experts advise investing in reliable assets that have been on the market for a long time and have a high capitalization. Investors in this case do not suffer from the manipulative actions of other market participants.
Such a criminal scheme is well illustrated in the film The Wolf of Wall Street, which starred Leonardo DiCaprio. By the way, the plot of this tape is based on real events. The bottom line was that brokers offered buyers “garbage” and useless shares. These manipulations helped the brokers earn money, but it all ended in an investigation of financial fraud and a prison for the organizers.
Investing in crypto is a fairly great way to make money in Nigeria today. The asset itself appeared just over 10 years ago, and the crypto became popular even later. Fraudsters constantly use the lack of knowledge in this area, agitating newcomers to buy certain coins.
Frauds related to new projects or startups are especially common. The pseudo-developer allegedly creates a promising blockchain platform and launches a native coin on it. Although the same scheme works for tokens. Further, through aggressive advertising and with the help of many incomprehensible words in the White paper, potential novice investors are interested in this project.
To increase the effect, the coin is pumped, which leads to an increase in the cost. Beginners fall for the bait, they see the potential of the new platform and invest their own funds in it. The organizers collect investments and, of course, do not invest them in further development. They just take the money for themselves and go to rest on tropical islands. Of course, until they are found there by law enforcement agencies.
The difference between “pamp” and hype
Do not confuse “swing” for the purpose of fraud and the hype that is spontaneously created around cryptocurrencies for various reasons. For example, consider a few situations:
- DOGE memecoin. Nobody ever considered this crypt as a promising project. It was created only as a joke and dedicated to the dog. However, due to one tweet by Elon Musk, its value has increased dramatically. Of course, the head of Tesla did not have the goal of making money on this. Therefore, such actions cannot be considered illegal.
- Cryptocurrency SquidGame. The creators of this coin did not artificially create a stir. They simply took advantage of the popularity of the Netflix series of the same name. As a result, the popularity of the coin was very high and it was quickly sold out. The creators took these coins and fled. So this is a classic scam.
Why is this strategy popular in the crypto market?
The cryptocurrency sphere is now practically not regulated by local or international legislation. Taking advantage of this, as well as the high natural volatility of the crypt, scammers began to use the “swing” scheme with the crypt.
Telegram is most often used to spread the word about future growth. This messenger is quite popular and has mechanisms that allow administrators of fraudulent channels to remain incognito.
Now the members of the cryptocurrency community themselves are starting the fight against Pump and Dump. In particular, many centralized exchanges introduced liability for the buildup of asset prices. Users who are seen in such actions are blocked with the freezing of existing assets and the subsequent investigation of fraud. Such rules, for example, were introduced by Bittrex.
What is the result
If you apply the rules of risk diversification, invest only in reliable assets and do not “be led” by calls to buy some little-known asset, the chances of suffering from a “swing” are minimal. But this does not mean that investing in crypto is a risk-free activity. You should always be prepared to lose money. However, diversification allows you to cover losses by increasing the price of other