Dhe concepts well known in the world of financial markets are pump and dump (P&D), concepts that are related to a manipulative action in the markets that aims to do the following:
- A sudden increase in the price of the asset, which leads to juicy gains for those driving the movement from the start.
- A sharp drop in price due to the massive sale of assets, which floods the market causing new investors to lose their money.
You have to be very careful with these situations, you can learn to detect them, because They are used by unsentimental speculators who seek to take money away from other speculators by creating false sensations of market growth..
In this article we will explain this situation in more depth as much as possible, in the easiest way possible, so that you can escape from this type of situation that occurs in all types of markets, including cryptocurrencies, but especially in markets with little liquidity, as they are easily manipulated. That is to say, in the world of cryptocurrencies this will occur mainly in altcoins, being really complicated to happen in the market Bitcoin.
How do you give a pump and dump?
A pump and dump scheme usually occurs when a company, financial company, groups of traders or whales, decide to start an advertising campaign to attract people to a market.
The recipe is very simple:
- You buy an asset.
- You market the asset by talking about its technical potential and the like.
- You wait for everyone to enter.
- You sell the asset.
- Repeat with another.
Who can do this? Well, anyone who has the ability to manipulate the opinion of large numbers of people and has little dignity. This recipe occurs with special frequency in the cryptocurrency sector, but it can occur even in large markets, where large investment funds do it even with entire countries, betting short or long on the future of the country accompanied by large advertising campaigns through the media they control.
In any case, the idea is to take a financial asset with a profile that can be striking. Subsequently enhance said profile through an advertising campaign. This with the aim of becoming a bait to attract more investment, while those who carry out the campaign have already bought large amounts of the asset at a fairly low price previously.
The advertising campaign, on the other hand, must make sure to attract the largest possible audience, and incentivize a great streak of market activity to create a FOMO (Fear Of Missing Out, or fear of being left out) which ends up driving market activity quickly, and causes the price of the asset to skyrocket due to the huge demand for it. If at this point, other fundamental signals of the ecosystem where that asset is located accompany the growth, all the better.
At this point, the more people participate in the market, the more liquid it will have, and the greater the increase it will experience, especially if the existence of the asset to be purchased is limited. This entire stage is known as pump, because it is responsible for bringing the asset price as high as possible.
When a point is reached where the price of the asset is interesting to the deceivers, they liquidate all their positions by flooding the market.
At that point, the supply of the asset is so great that it widely exceeds the demand for it, and in light of this fact, the price of the asset begins to decline rapidly. As a result, investors who have recently bought assets are often left with assets at a much lower value than what they paid for. Investors with a little more time in the market, may have more or less significant drops in the value of the asset (+ - 50% on average) and the rest have varied losses depending on their reaction to the drop. In any case, those who obtain most of the profits are those who bought the assets before the price increase, that is, those who were aware of the pump & dump scheme that was being applied to the asset in question.
Generally, in the past these pump & dump schemes were quite laborious. Many times it is resorted to calling traders, encouraging stockbrokers to participate in a certain purchase, or making fantastic news appear about a company to raise its shares and carry out a full-blown pump & dump. However, with the advent of computers and the Internet, the realization of these schemes became much easier. Now, a story could have global reach in minutes, the propaganda could reach several markets, and therefore the momentum of the scheme is greater. Fortunately, just as technology makes it easier to carry out these schemes, it also makes them easier to detect, making them require other tricks to be carried out successfully.
Pump and Dump in the crypto world
Cryptocurrency markets, like any market, are not exempt from these dangers. In fact, they are much more likely, not only because they work on the Internet, but because:
- People who participate in these markets generally do not have a financial preparation to detect these types of fraudulent schemes.
- There is no regulation that prohibits this in the world of cryptocurrencies.
- The founders of altcoins themselves make indiscriminate use of this type of deception.
- There is a widespread belief that the crypto market can make you rich overnight, if you know how to seize the opportunity.
The best proof of this is the large number of scams, fraud and other illicit activities that have been carried out using the name of cryptocurrencies.
El ICO boom It is, perhaps, the worst example of this, since many people invested in projects that were basically smoke and stones. Again, at this point what led to this sad denouement was not the cryptocurrencies or ICOs themselves, but the little knowledge of the people who participated in those schemes, the bad faith of the authors, and the failure to observe clear indications. of scams on those promises of easy money.
But beyond this, the pump & dump in the crypto world is the same as in the traditional financial world. The only thing that changes is the methods and the scope, but the rest, it is the same fraudulent and dangerous action.
However Are all pump & dumps fraudulent and premeditated? Not all, but those cases are very rare to see. A good example is what usually happens with the currency Dogecoin. A quick look at the market chart for this cryptocurrency gives us a well-defined pump & dump history. The case of DOGE is strange because it is generally a price rise reaction that is linked to periods of rise in the price of other cryptocurrencies. Result: when the price of Bitcoin and other cryptos increases, there is usually a community pump in DOGE, which raises its prices and is taken advantage of by the users of this cryptocurrency.
The result is far from being "fraudulent" by a simple fact: The DOGE project has made it very clear from its inception that it is a meme cryptocurrency, and that makes it very clear that it is not a financial asset focused on payments or real financial activities, if you use it and accept it, you do it at your own risk. The simple act of going public with its “digital joke” nature saves you from considering these pump & dumps as fraudulent, and if you participate in them, it is because you are aware of that.