Pump and Dump is a market manipulation scheme in which certain individuals seek to profit in unethical ways in order to get the most return on their actions.
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 has the following purpose:
- 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, in the easiest way possible, so that you can escape 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.
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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? Anyone who has the ability to manipulate the opinion of large numbers of people. This recipe occurs with particular 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 may 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 quantities of the asset at a fairly low price previously.
The advertising campaign, on the other hand, must ensure that it attracts the widest possible audience and incentivises a great flurry of market activity in order 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 vastly exceeds the demand for it. And, faced with this fact, the price of the asset begins to decline rapidly. As a result, investors who have recently purchased assets are often left with assets at a much lower value than they paid for. Investors with a little more time in the market may have more or less important 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 the most 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 schemes of pump&dump they were given in a rather laborious way. Many times they resort to calling traders, encouraging stockbrokers to participate in a certain purchase, or making fantastic news about a company appear 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 piece of news could have a 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 it easier for us to detect them. This means that they 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 take advantage of 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 scope. But, of the rest, it is the same fraudulent and dangerous action.
But Are all pump&dump 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 very clear pump & dump history. In case of DOGE It is strange because it is generally a reaction of price rise that is linked to periods of rise in the price of the rest of cryptocurrencies. Result: when the price of Bitcoin and other cryptos increases, there is usually a community pump in DOGE. This 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.
Regulations against pump & dump
In traditional stock markets, pump&dump actions are regulated, vetoed, and often include financial and jail sentences for their implementation. In Spain, the CNMV closely monitors this type of behavior in traditional markets. For this reason, it penalizes this type of actions as corresponds to its financial behavior regulations. However, the regulations apply only to traditional markets, leaving the world of cryptocurrencies outside of this regulatory framework for now. In fact, sometimes regulations are applied that do not correspond to the reality of the crypto market, due to its very high dynamism and activity.
It is very important to know how to detect these patterns, in order to avoid falling into or participating without knowing it. We see how altcoins, which have some teams behind them, articulate and manage this sometimes directly, and sometimes with collaborators.
Analyze the projects for yourself, learn to do it, and while you don't know how to do it, we recommend you not to speculate with cryptocurrencies.