What is a pump and dump of cryptocurrencies?
The cryptocurrency market has grown significantly in recent years. In many ways, trading schemes from the stock market flowed into it. Including fraudulent schemes. Pump and Dump is one of them.
Often, novice traders hear that some cryptocurrency was pumped, and then a dump occurred. If you understand the origin of the words “pump” and “dump”, you can determine for yourself what a pump and dump of cryptocurrencies are.
Pump & Dump in simple English means “pump” and “dump”. In the same way, in relation to the market, it can be understood that this is a pumping and increase in the value of a crypto asset, and then its artificial fall.
Pump and dump in history
The case of 1720 is considered the first major pampas. In England there was the South Sea Company. For several years before the pump, the company filled the country with rumors about its great opportunities and promised a number of priorities to shareholders.
However, over time, it turned out that not all priorities were available and obligations were not fulfilled.
Nevertheless, the rumors were inflated so skillfully that they came across very famous and influential people of the country. As a result, the company used their names for further advertising. Considering this fact, the middle class and even peasants began to buy their shares.
In addition, the collapse of a competing trading company in neighboring France further attracted investors from other countries. As a result, in January 1720 the value of the share was £128. Already in May it became £550 and in August rose to £1000.
However, it was already difficult for the owners to keep their lies. As a result, at the very beginning of autumn, a rapid fall in the stock price began. The owners began to sell them en masse. At the end of the month the shares were already worth £150 and a few days later the South Sea Company declared itself bankrupt.
Subsequently, similar schemes have already operated in the modern stock market. For example, they were very popular in the 1990s and 2000s. Currently, the stock market is highly regulated.
As a result, pumps and dumps became illegal. But on the crypto market, such manipulations by large players constantly occur to this day. This is possible due to the lack of a unified regulation of the crypto market and the impossibility of combating this phenomenon within a single legal field.
How does this happen?
Organizing a cryptocurrency pump is currently not too difficult. We need funds and a large number of participants. Very often, organizers create their own large channels and chats in Telegram. Thanks to the data encryption system in the Telegram messenger, all correspondence remains inaccessible to third-party users.
In addition, it is completely controlled by the organizers of such chats. Large traders organizing pumps are called whales. And ordinary traders who participate in them due to their naivety are called hamsters.
Hamsters buy the specified cryptocurrency at a time when the whales have already purchased it. The latter spread false rumors about grandiose events around this asset, about new partnerships, events, etc. As a result, hamsters believe in growth and already recommend this asset to others for purchase. Meanwhile, the organizers are already starting to sell their pre-purchased crypto assets.
That said, a large number of purchases leads to an increase in the value of the cryptocurrency. It occurs until the moment when the amount of sales does not exceed the amount of purchases. After that, the price goes down. In trading slang, this is called “haircutting hamsters.”