What Is Pump & Dump? How Not To Lose Your Money?

3 years ago

The fraudulent scheme to make a profit off of the gullible traders appeared during the times of stock exchanges — Pump and Dump. There, however, price rate manipulation is punishable by fine, depriving the license, or even prison. That’s why frauds have moved to cryptocurrency market.

We’re gonna discuss how Pump and Dump works, and how not to fall victim to this scheme.

How does Pump and Dump work?

The essence of Pump and Dump is about increasing the price rate of a little-known cryptocurrency and then breaking it down.

All pumps are carried out in three stages. First comes the preparation, when scammers choose a practically unknown cryptocurrency or an ICO token with a low price. They then gradually buy this asset to accumulate enough resources to manipulate the price rate and not affect its value ahead of time.

The second stage is the pump itself when the price of the cryptocurrency goes up by 30%, 50% or even 100% percent. To do this, the organizers send out a signal to the participants on social network communities or instant messengers. The message reveals a cryptocurrency to purchase, explaining that it will soon rise in price. In addition, the positive fake news may be launched, claiming, for example, the near completion of the innovative technology development or a profitable partnership.

The third stage is called the dump, at which point the organizers of the whole scheme cease to artificially stimulate the price increase and, on the contrary, knock it down by listing the sell orders. Those who believed in the Cryptocurrency growth and bought it at the peak of the price rate, well, there’s nothing left for them but to sell it for a pittance to return at least some of the money.

Is it possible to profit from the Pump?

Some traders believe they can take advantage of the moment and make money on the pumps. In theory, this is possible, but on practice, the chances of success are minimal.

It is important to distinguish between short-term and long-term pumps and dumps. The short-term pump lasts from a few minutes to a couple of hours and is designed exclusively for members of the specific group. Only organizers make a profit here.

With a long-term pump that can last several days, after the initial pumping of the rate, generic traders enter the game, who see the growth of the cryptocurrency and want to buy a fast-growing asset. At this stage, you can try to make a profit if you buy at the start of the pump and sell it before the price goes down.

In theory, this seems possible, but during the pump, things develop too quickly and don’t work with price forecasting tools. As such, most traders in the pursuit of easy money miss the time when they need to sell, and then the price drops sharply, and they remain with nothing.

Why is it that nobody punishes pumpers?

In the cryptocurrency market, the pump and dump organizers work openly and are not afraid of anyone because of the lack of legislative regulation. On the Internet, you can find websites dedicated to pumps, and in messengers like Telegram, there are many relevant channels too. The whole point is that the cryptocurrency price rate manipulation is not pursued by the law.

Well-known cryptocurrency exchanges fight against pumpers on their own, for the sake of preserving their reputation, banning the accounts of scheme organizers. But in the market, there are many small trading marketplaces that benefit from scammers because they will bring in new traders, and the stock exchange will profit off of the commission fees.

As such, the only way to fight off pumpers is to adopt the common sense regarding the practice, because no one will want to fall for this trap twice. But even here scammers have their own tricks. After each pump and dump, they publish pre-prepared false information from dummies-members who allegedly made a profit. And all those who lost money are accused of violating the instructions, and therefore, they have themselves to blame. This is an old, but unfortunately very effective psychological trick.

How not to fall victim to Pump and Dump?

It is not difficult to protect yourself from the Pump and dump scheme. First, you don’t chase easy money and you don’t join the Pump and Dump communities.

Secondly, if you see a fast-growing asset, then carefully analyze the situation before buying it. You need to make sure that this token is not being pumped right now, and check whether there was any manipulation of the price rate before that, because fraudsters often use the same cryptocurrency several times. And if everything is in order, make sure that the cryptocurrency has reliable reasons for growth.

Don’t chase after easy money and think with your head — this is the best protection against any scammers.