12.07.2021 Michael Golikov
Pump & Dump is a trading strategy based on a sharp increase in the value of coins or tokens (usually with a small capitalization). The name “Pump & Dump” perfectly describes the whole scheme. Greed, lack of experience, and newcomers' desire to earn quickly and a lot lead to the fact that most of them lose their money, and only the authors of this scheme get rich.
What does the classic Pump & Dump look like?
- Pump & Dump organizers invest their funds in this or that asset and start pumping it massively, involving opinion leaders, recommendations of “experts” and creating a maximum hype around the project.
- The effect of the crowd that craves easy money is triggered. A lot of people come to the project and start buying the asset, creating a stir and pushing the price up.
- As soon as the price of the asset reaches a peak, the organizers of the scheme fix the profit and begin selling their coins (tokens).
- As the price of the asset begins to go down, the crowd begins to panic, and people sell their coins in a hurry, pushing the price down even more.
- The result is that the price of the asset falls below the original level. The organizer of the scheme benefits greatly, and the rest of the crowd is at a loss.
- After that, the asset may leave the exchange and lose popularity, or it may survive a few more Pump & Dump cycles.
Despite the fact that the Pump & Dump scheme is now mostly associated with the world of cryptocurrencies, its history goes far back in time. Officially, the first example of Pump & Dump was the so-called “South Seas Bubble”, in which an English trading company sold shares to investors, among whom were well-known personalities - lords, titled persons, and even Isaac Newton himself.
The South Sea Company used these facts to further advertise its shares, as well as to spread rumors about achievements that in fact did not exist. Spain, for example, allegedly made its ports fully available to the company's ships. Against this background, from January to August 1720 the price per share soared from 128 to 1,000 pounds. But in September, the rate collapsed to 150 pounds, and the company declared bankruptcy.
A more modern example was vividly shown in the movie “The Wolf of Wall Street.” This was the strategy used by Jordan Belfort, selling “junk” shares at an inflated price, convincing inexperienced investors of the rapid growth of these assets. For which he was later convicted.
The modern authors of such schemes have at their disposal dozens of tools for organizing a hype around the project. Opinion leaders, Telegram channels and social media groups, tweets from “experts” of the market, closed signals - all this allows them to quickly attract hundreds of thousands of new users to the project, who quickly rock the exchange rate of a low-capitalization asset.
Why low? Because it's easier to make the cherished X's of profit. If an asset has a capitalization of, say, $1 million, then even with a small number of buyers, the price of the asset can be rocked several times over. With bitcoin or Ethereum, which have a capitalization of billions, this is much more difficult to pull off.
However, you should know that there are short-term and long-term pumps. And, if the first ones can last a few hours or minutes, then the second ones can take several days or even months. One of the recent striking examples is Elon Musk, who either jokingly or not, constantly pumps the Dogecoin cryptocurrency. In 2021, the price of the coin increased by 1500%, which suggests the purposeful application of the Pump & Dump scheme by the famous entrepreneur.
How to avoid fraud and identify Pump & Dump in time
Here are some simple working tips that will allow you to understand that a price pumping scheme is unfolding in front of you:
- There is nothing but pretty words behind the project. There is no real business and no experienced team.
- The asset is traded on unknown or very small exchanges.
- There is a surge of activity on the exchange with a high number of large orders.
- The project pours a lot of money into flashy advertising.
- You are promised fabulous profits in a short time.
- The project has a very low capitalization in the market.
- The rate grows very fast with no real results and achievements.
- You are strongly recommended to buy coins or tokens of the project, assuring in their further growth.
- The team of the project is hidden, or the creators have been previously seen in dubious actions and frauds.
Can you make money on Pump & Dump?
It is, of course, possible theoretically. But the risks outweigh all the potential benefits. The organizers of the scheme calculate all the moments and points of entry and exit. So, most likely, you will buy an asset already at an inflated price and will not have time to sell it in time.
It should be understood that the market manipulations are profitable only for their authors, and it is almost impossible to make money on other people's schemes. In any case, the classic advice to all investors - DYOR (“Do Your Own Research”) is more relevant here than ever. Be careful, always do your own analysis, and don't chase easy and fast money.
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