What is pump and dump in crypto and how does it work?

Pump and dumps are coordinated manipulation of the value of a commodity for a quick rise followed by a sharp drop in the asset’s value. As the name implies, the ‘Pump’ describes a sharp price growth, while the ‘dump’ describes the following sharp drop.
Pump and Dump is a generic term, with its application cutting across every investment space. However, it has seen more relevance in digital investment spaces. Such practices are easier to effect in environments like these. Such assets include stocks and shares, precious metals, and digital currencies like Bitcoin. This article focuses on Pump and Dumps in the crypto space and how this applies to the everyday trader. First, what is pump and Dump in crypto?

What is Pump and Dump in Crypto?

Cryptocurrencies are known for their volatility. But sometimes, this volatility is influenced by artificial causes and could be followed by a sharp drop. The basic concept is sustained, but cryptocurrencies are involved this time. Pump and Dump in crypto is a common concept, for assets with low liquidity, this is even more common. Crypto pumps and dumps are coordinated and targeted towards a pre-selected crypto asset. The common goal here is a quick profit for the perpetrators. Here’s how it works

How crypto pump and dumps work

The execution of a pump and dump is straightforward,
First, a congregation of traders is built using available social media platforms, then the pump and dump selects a crypto asset and crypto exchangeto be used and communicates the schedule for the event and target price.
During the agreed time, the traders in the community proceed to make quick purchases of the selected asset, this leads to a sharp rise in the value of the asset. The rise attracts other traders to buy into the asset, which further grows the price, when the target price is reached, the traders proceed to sell the purchased asset, making profits and leaving other buyers in losses. The success of the pump and dump depends on how well the community adheres to the plan.
Another step in a pump and dump is the shilling of the asset. This usually starts after the community members have made their purchase. A coordinated dissemination of information about the asset follows. This attracts other traders to take a look at the asset which is already growing in price. This is also known as a pump signal, but it is not limited to this explanation.

What is a pump signal?

For the pump and dump community, a pump signal is a notice of the details of the pump and dump. It is an invitation to purchase the asset before the external pump signal commences. For the non-members of the community, the Pump signal is usually a shill by contracted influencers or community members. This is done by a coordinated positive evaluation of the asset, including the sudden price growth. This attracts more people to buy and grows the price further.

What are Pump and Dump groups?

Most crypto pump and dump groups use Telegram, another known social media platform used by crypto Pump and Dump groups is Discord. Depending on the popularity of the pump and dump group, each community could consist of a few hundred to thousands of traders.
The pump and dump groups consist of different tiers of members. The Admins control activities in the group, including the dissemination of information about the intended activity. The community also consists of coaches who are usually tasked with educating new members of the community’s culture. Older members are also tasked with inviting other traders to the group, this is usually rewarded with perks such as a growth in their rank. This might mean access to more information.

How to detect Pump and Dumps

Due to the widespread volatility of cryptocurrencies, it is hard to differentiate a pump and dump from a genuine price jerk. However, there are a few things to look out for

Liquidity and popularity of asset

If a relatively obscure crypto asset with low liquidity suddenly starts going up massively in price. It is advised to do proper research before buying into the pump. Low liquidity and less popular assets are easy targets for pump-and-dump groups. This is because their price moves up easily.

Sudden hype

One of the ways pump and dump groups boost their profits is by shilling the target asset. If an asset suddenly starts being discussed by social media accounts and popular traders, it is also advised to do further research.
While this doesn’t guarantee it to be a pump and dump, it is one of the common characteristics of known pump and dump cases.

What are pump bots and how can they help you make profits?

The hack in pump and dump is Speed. Your ability to detect the pump, and make quick buys and quick sale is paramount to making profits in your trade. A pump bot can help you do each of these faster and with ease.
Once you obtain information about the assets to be pumped, the pump bot can help you make a quick buy and when you wish to sell, the bot can also help you make a sale. This can be done in a few seconds. Some advanced bots can be automated to make repeated buys and sales according to set algorithms.

FAQ

Are Pump and Dumps legal?
The legal provisions for pump and dumps are not clear, since it is not the same as insider trading. However, from a financial law aspect, they are illegal as artificial manipulation of community prices is illegal.
How much profit can you make from a pump and dump?
How much profit you can make from a pump and dump depends on four factors.
• Your capital
• Your point of purchase
• The Success of the pump and dump activity
• Your point of sale
You can make a substantial amount if you buy early and sell before the asset starts to dump.
Is it possible to join a pump and dump group?
Yes, however, this might depend on the community structure. Some Pump and Dump groups are public while some are strictly based on invitation.

Conclusion

Pump and dump is a turbulent way to make profits. while this can be rewarding, it also has its risks. One of the risks is being trapped when the asset dumps. Traders who fail to take profit before the pump even ends could run into losses. Therefore, it is important to do proper research and invest wisely |