Pump and Dump

To start with, more or less all platforms have a minimum staking amount so that there is balance and an appropriate proportion of personal interest. Ethereum for instance asks traders to buy at least 32 Ethers.

What does Pump and Dump mean?

The concepts of Pump and Dump (PD) are related to the market world and its pretention is to manipulate it. PD schemes pretend to increase the price of an asset so that those driving the movement make large profits, and to lower the price of the asset so that the massive sell-off causes new investors to lose their money.

Where does PD occur?

These situations occur in all types of markets, although it often happens in those with low liquidity, as they are easier to manipulate. In the cryptocurrency sector, therefore, it is more likely to occur in the altcoins market. Its more complicated to happen for example in a larger market, such as Bitcoin.

Who does this?

Anyone with manipulative skills and dishonesty is capable to make this action happen. You must be careful because the speculators who carry out these moves are trying to make money from other speculators by making them believe that the market is booming. Traders and brokers are often called in to participate in the purchase of these assets.

It's not unusual for the PD organisers themselves to claim that they are going to make a large purchase to generate confidence in new buyers. This should alert us and lead us to check the volume of a cryptocurrency to see if there are any unusual movements that would put us on alert.

Its also possible that news about the asset or company to appear, encouraging people to buy, so its shares grow up and later carry out a PD.

How is this done?

The steps are the following:

  1. Acquisition of an asset
  2. Make active marketing about it and wait for people to become familiar with the potential of the asset.
  3. Sell the asset and repeat the whole operation.

Let's explain it in detail:

The idea is that you want to enhance the image of an attractive financial asset using an advertising campaign. This will then be the bait to attract more investors. Previously, the campaigners (companies, firms or traders) will have bought large quantities of the asset at a low price.

The campaign aims to reach as many people as possible and create a FOMO* (Fear of Missing Out). Due to FOMO the price of the asset will increase as many people will want to be part of the movement.

The more demand there is, the more will increase the price of the asset. This will lead to an increase in liquidity. This stage is known as pump. Once the price of the asset has reached a peak, the architects of the process will sell their assets.

After the assets are sold, supply will be greater than demand, making the price of the asset to fall. All those who have bought assets, and have not sold them at that time, will be left with an asset of a lower value than what they paid for.

*FOMO is nothing more than anxiety in society caused by missing out on experiences.

PD and cryptocurrencies

The cryptocurrency market is very prone to PD as all its development takes place online. This scheme works in the same way in the cryptocurrency world as in any other type of market. It should be borne in mind that cryptocurrency holders are not always specialised people, so they will not be able to detect these frauds easily.

Also, there is any regulation that prohibits these acts, and sometimes its even the founders of altcoins themselves who make use of PD to make a profit and give a (false) value to their currency.

It is crucial that the user of a cryptocurrency has enough information and preparation to avoid getting involved in fraudulent processes. Speculation and volatility are factors to be taken into account if you want to participate in the crypto market, as they allow the currency to reach more places.

Volatility also influences the price of an asset. With a relevant training and experience, you can learn to spot this situation. This is noteworthy because participating in a PD can lead to the loss of your money.

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