In this article, you will learn what is a crypto pump and dump scheme. Cryptocurrency trading is constantly growing and changing. The cryptocurrency market is essentially a new, rapidly expanding frontier. Many would-be millionaires are taking advantage of insufficient regulation to employ tactics that are illegal in other markets.
What Is a Crypto Pump and Dump Scheme?
The idea behind a pump and dump scheme is simple: A group of bad actors deliberately buys an asset, often small-cap stocks or other thinly traded securities, sings its praises to anyone who will listen — using false news or information (pump) — then sells when the increased activity drives up the stock price (dump). This often leaves those who bought the hype holding the bag, as asset prices crumble and artificial demand dries up.
How to Spot a Crypto Pump and Dump Scheme?
The easiest way to spot a pump and dump is to start by understanding its mechanics. If the value of a relatively unknown coin rises suddenly without reason, there's a good chance manipulation is at play. It's always best to do some digging before making a purchase . Avoiding rushing into a project before you've researched it.
Here are the five main symptoms to look for.
- Monitor the Price Movements
A prime feature of pumps and dumps is their sharp price movements. While price swings can happen with any coin, during pump and dump a coordinated action among a party of schemers is occurring. A coin's value starts rising quickly for no discernible reason, and then Later falls just as rapidly with no obvious explanation.
- Promotion Source
Pump and dumps are often coordinated schemes masterminded in online chat groups. Known pump and dump groups can be followed, though some may charge for timely information. The number of people in one of these groups can be as high as 200.000. though smaller groups have about 2.000 individuals. Relatively anonymous and private channels on Discord and Telegram are often used to coordinate such schemes.
-Keep an Eye on the Trading Volume
Thin liquidity, otherwise known as thin trading volumes, usually means order books aren't full of buyers and sellers to stabilize pricing. Market makers may not have much interest in a particular name to keep creating buy and sell orders. As a result, it's easy for the price to spike well past typical levels, especially in a short period of time. Any asset with thin order books is more prone to price and trading manipulation.
- Market Capitalization
The market capitalization of a coin is calculated using its price multiplied by the supply. Pump and dump groups target low market cap coins more frequently because coins with smaller supplies also often exhibit less trading activity. These smaller coins are subject of groups to price bad actors.
- Regulations
Exchanges that are less regulated are often more vulnerable to pump and dump schemes. Analysis has found that pump and dump schemes are found relatively more frequently on exchanges Binance and Bittrex, compared to heavily regulated US-based exchanges. Often, the price and volume spikes occur on a single exchange, rather than several exchanges.
Bottom Line
Pump and dumps result in large swings in price movement, which can produce large gains. Profiting from pump and dumps is possible if you're on the right side of the trade. So, this is about what is a crypto pump and dump scheme.
