This year, the capitalization of the cryptocurrency market has come close to the mark of 200 billion dollars. At the same time 80% of the total amount accounted for Bitcoin, ethereum and Bitcoin cache. Hundreds of other currencies cannot reach the top in any way – they are in low demand and, accordingly, cost little. However, they are most often used to conduct fraudulent schemes like Pump & Dump.
Experts call Pump & Dump a canonical pattern of market manipulation. The scheme is based on the manipulation of the cryptocurrency rate to make a profit from the sale of coins at an artificially high price.
The scheme itself is not something new – in the last century it was actively used by financial brokers on Wall Street. However, if the stock exchanges today are regulated at the legislative level, the uncontrolled cryptocurrency market is a paradise for Pump & Dump fans.
Experts say that the fraudulent scheme flourishes on most cryptocurrency exchanges. Bittrex (USA) and Yobit (Russia) were especially notable. Journalists of the thematic edition of Business Insider found out that at these sites the Pump & Dump scheme was used for promotion of a number of cryptocurrencies. At a minimum, we are talking about Magi Coin, VCash, Indorse, Chill Coin and UBQ.
That is, this problem is common and urgent, and still extremely dangerous for newbies, who most often fall for the scammers. Therefore, it will not be superfluous to learn how Pump & Dump works, who can crank up such a scheme and how to protect against market manipulations.
With Pump & Dump, the appreciation is always associated with a large volume of currency purchases, and a decrease with a large volume of sales. But how does it look in practice?
First of all, a diaper (that is, a trader who is going to pump up a cryptocurrency) chooses coins that are little known on the market and artificially inflates their exchange rate. This is done through abundant financial influences, in some schemes even six-digit sums appear. Pamper is the primary investor in Pump & Dump, the so-called insider. He buys coins and creates overpriced bids (large buying walls), and then sells them to secondary investors. In the role of the last are the investors who do not know about the emerging fraud (outsiders) and begin to massively invest money in the “successful” cryptocurrency.
Because of the new injections, the value of the coin rises even more. And when it reaches the level required by the pamper, it quickly “merges” new assets at an inflated price to newcomers. This is a dump, the consequence of which is a sharp drop in the artificially inflated rate. As a result, the trader is left with a profit, and secondary investors – with a bunch of unnecessary coins.
In the cryptocurrency community, single pampers are called “bears”. As a rule, these are well-off people who can afford to invest tens or even hundreds of thousands of dollars in pumping a little-known currency. All stages they go through alone buy the currency themselves, initiate its sales themselves and sell the assets to outsiders (which, by the way, are called “hamsters”).
Interestingly, sometimes they do not even have to put much effort to spin the selected coins. For example, the bear, quite well-known in the cryptocurrency community, with the nickname Fontase, initiates sales of the coins he needs using his own Twitter account. He launched Pump & Dump Mooncoin and Dogecoin, simply making posts about a sharp increase in the exchange rate of these currencies. Naturally, he himself had previously pumped up these “promising” coins.
It is much easier and cheaper to pump up cryptocurrency with other people. There is no need to raise the course alone – it is enough to unite with other pampers and rock the market with common efforts. As a rule, there is a coordinator who creates a general group for holding Pump & Dump. Most beginners are victims of collective pampers, so it makes sense to consider the schemes of their work in more detail.
How does Pump & Dump work in the cryptocurrency market
Modern pump communities actively develop their activities in social networks and instant messengers. He especially liked the well-encrypted Telegram – there are PumpKing, WePump, Crypto4Pumps, Pump.in, AltTheWay and other groups in it. The PumpKing community is leading, with more than 17,000 participants and always adheres to the proven 4 phase Pump & Dump.
The group coordinator informs the other participants of the name of the coin for pumping and the platform on which the bidding will take place (that is, the cryptocurrency exchange). Thousands of users start a pump at a specified time – they buy in bulk the selected cryptocurrency, thereby increasing its price several times.
Now insiders need to attract as many secondary investors as possible. To do this, they are sent to the popular advertising boards and thematic forums, where they talk about the sudden jump in the rate of cryptocurrency and in every possible way promote it in front of other visitors. Very often they send catchy texts to private messages to Telegram users. They act at the same time quite deliberately – they are looking for outsiders on the channels dedicated to cryptocurrencies, and send draft messages like “Friend! I know that tomorrow the price of cryptocurrency X will increase 10 times. My friends and I decided to invest in it, but we want to attract more people to get even more profit. Are you with us?”.
Another characteristic move is the creation of false info lines in the network. Insiders distribute advertising articles in advance with intriguing names and calls to invest in “a very successful cryptocurrency that will soon overshadow Bitcoin”. As a result, many gullible outsiders buy up coins and raise the rate even more.
It is important that at this stage the inflated cryptocurrency really looks very popular and promising. Not only has the price jumped sharply, but also high sales walls (i.e., huge coin purchase orders) testified to its success. It is easy to guess that these walls are also artificially created by insiders themselves. By the way, quite often to create it, are used specially programmed bots.
After outsiders have shaken the selected coin, and its price has reached the planned peak, insiders massively sell their assets at an inflated price. At this stage, the advertising campaign continues – interest in the currency is maintained so that insiders are guaranteed to sell all their assets to secondary investors. On the exchanges with the help of all the same bots now put up huge walls of sales.
When insiders got rid of the acquired assets and earned enough money to manipulate the course, the advertising campaign stops. Awesome orders disappear, the liquidity of cryptocurrency is steadily falling, and the rate drops to the initial level or even lower. Outsiders are left with coins that have drastically lost in price and that are simply no one to sell.
Recently, another Pump & Dump scheme, the so-called hidden pump via ICO, was being actively used. The diapers pick up an idea that may be of interest to the members of the cryptocurrency community, and begin mass promoting it through all possible channels. Most often, fake “analytical” articles are published about the project’s incredible prospects, and many investors actually invest their money in it. The organizers collect funds from investors, withdraw their tokens to cryptocurrency exchanges, sell them at an inflated price, and then simply disappear, leaving investors with useless pseudo-cocoons.
Today, the situation with Pump & Dump on the cryptocurrency market already looks critical. However, after analyzing the schemes described above, it is easy to understand how not to become a victim of fraud.
How to protect against Pump & Dump when trading cryptocurrency
Experienced traders also speak about the characteristic signs of Pump & Dump, by which you can quickly understand that there is a fraudulent scheme in front of you, and not a promising project. Among the main signs is
In addition, there are special services (for example, CoinData) that track the pamp and cryptocurrency dump on different exchanges. The use of such sites is paid, but if necessary, you will be able to know for sure whether the sharp increase in the rate of the cryptocurrency you are interested in is natural or you are dealing with Pump & Dump.
However, many traders use such services not to make sure that the currency grows justifiably, but to earn money on the pump. After all, pampers get a huge profit from pumping and subsequent draining of cryptocurrency. If you are lucky, having invested 10 thousand dollars, you can, as the pampers themselves say, “cut the hamsters” all 50 thousand. But if everybody is so lucky, is it possible to use Pump & Dump as a means for investment, and not a fraudulent scheme?
Can I make money on Pump & Dump?
If you are not going to become a “bear” or join a pump group like PumpKing, there remains only one way to earn money from Pump & Dump – buy the currency before the peak of growth and sell it before the sale phase.
For example, you buy a pumped currency, while it costs another $ 1. Then wait for the peak (say, $ 10) and quickly sell assets at a better price. Thus, with each unit of cryptocurrency, you get $ 9 net profit.
However, this method is very doubtful. Being an outsider, you do not know anything about the planned peak price of the currency, after which the dump will begin. One wrong step – and you just stay with a pile of unnecessary coins. This way is suitable only for experienced traders who have already learned how to predict plums, and are confident that they will be able to get rid of the purchased assets in time.
In addition, we must not forget that in all regulated stock markets, the Pump & Dump scheme is considered illegal. The cryptocurrency market is still unregulated, but most experts agree that the situation may change soon. The London and New York Stock Exchanges issued a statement that cryptocurrency exchanges should be regulated in the same way as stock exchanges. And the US Securities and Exchange Commission proposed the government to issue a law that would equate cryptocurrency to securities and regulate the activity of cryptocurrency exchanges at the legislative level.
How the situation will develop further is unknown. However, it is already clear that Pump & Dump is a problem of the cryptocurrency market, and not a way of earning for ordinary users. Only “bears” and coordinated pump groups can earn money on inflation, but not ordinary investors. The last best thing to remember is the protection measures against Pump & Dump, not to be conducted on provocations in the network and invest only in tested cryptocurrencies.