What is Pump and Dump? What Should You Do When This Phenomenon Occurs?

What is Pump?

“Pump” is a speculative strategy in the cryptocurrency market where traders deliberately create artificial demand for a particular cryptocurrency by simultaneously buying a large amount of that currency. This action aims to push the price up suddenly, creating attention and expectations of continued price increases, thereby attracting more new investors to join. The target coins are usually those with low initial value, small market capitalization, and little-known, making them easier to manipulate. However, this strategy is considered misleading and can be damaging to the market.

What is Dump?

“Dump” is the next action in the “pump” speculative strategy, where traders sell off a large amount of that cryptocurrency suddenly and indiscriminately. This action is carried out immediately after the price has been pushed to a certain high level according to the plan of the group executing the “pump” strategy.

By selling off in bulk, they create significant selling pressure, causing a sharp decline in the price of that currency. The main purpose is for them to sell at the highest possible price to capture significant profits from the price difference before and after the “pump.” This behavior not only takes advantage of market supply-demand dynamics but can also lead to misunderstandings for retail investors, causing them to view this as normal price volatility and continue buying, resulting in losses.

Pump & Dump is an unethical and harmful speculative strategy, where a group of investors or manipulators collude to execute two main actions: First, they create an artificial demand wave by collectively buying a large amount of a certain cryptocurrency, usually low-value coins with small market capitalization. This action causes the price of that cryptocurrency to skyrocket suddenly, attracting attention and luring more retail investors to buy at the peak.

Next, as soon as the price reaches the expected peak, the group of manipulators will unexpectedly sell off their entire large holding of the coin, causing a massive selling pressure that makes the coin’s price plummet. At this point, they have realized significant profits from the difference between the initial purchase price and the peak selling price, while small investors are pushed into heavy losses.

Pump & Dump behavior is a form of blatant and illegal market manipulation, carried out by groups with large financial resources to dominate cash flow and control prices at will. Although it only lasts for a short period, it causes serious impacts, undermining investor confidence and posing risks to the entire cryptocurrency market.

Example of Pump and Dump Phenomenon in Crypto

Potcoin (POT), a small market capitalization cryptocurrency, became the epitome of the “Pump & Dump” speculative strategy in the cryptocurrency market. In November 2016, within less than 24 hours, the price of POT skyrocketed unbelievably from $0.002 to a peak of $0.728, equivalent to a staggering 25,000% increase. Such a price surge was entirely disproportionate to any fundamental factors of the project, except for some rumors and price-pumping activities on forums.

However, just after about 50 days, the price of POT plummeted by a staggering 97%, dropping to $0.014, even lower than the price before being inflated. The rapid collapse and near-total loss of value of POT exposed the nature of a meticulously organized “Pump & Dump” scam. The perpetrators behind aimed to stimulate artificial demand, attract retail investors to buy at the peak, and quickly dump to realize huge profits, leaving them to suffer heavy losses.

Causes of Pump

The phenomenon of “Pump & Dump” – where large investors deliberately inflate the price of a particular cryptocurrency, then sell off to realize profits – is a serious issue in the cryptocurrency market. There are several main reasons leading to this situation:

Liquidity Issue

This is the main reason leading to “Pump & Dump.” Large investors, or so-called “whales,” often hold a huge amount of cryptocurrency, even larger than the trading volume in the market. To be able to trade such a large amount easily, they need to create higher liquidity by stimulating the trading demand of small retail investors, through inflating the value of certain coins.

Loose Legal Framework

Although cryptocurrencies have become popular globally, most countries still do not recognize them as legal means of payment. The lack of a clear legal framework and loose regulation from state agencies has created favorable conditions for market manipulation behaviors like “Pump & Dump.”

FOMO (Fear of Missing Out) Psychology

Investors tend to fear missing out on opportunities, especially in the volatile cryptocurrency market. They fear that if they do not participate in a certain “pump,” they will miss out on the opportunity to make huge profits. This psychology has been exploited by “whales” to lure small retail investors into “Pump & Dump” waves.

New Cryptocurrency Issuance (ICO)

When cryptocurrencies have been pushed to excessively high prices compared to their actual value, creating new “pump” waves becomes more difficult. At this point, large investors will shift their focus to newly issued cryptocurrencies (ICO), with low initial value, to easily execute “Pump & Dump” strategies.

The Process of Pump and Dump

The “Pump & Dump” process is typically carried out in a sophisticated three-step cycle by large investors or “whales”:

Step 1: Accumulation

The “whale” group will start by accumulating a large amount of a low-value cryptocurrency with a small market capitalization. This action is not only to hoard the commodity but also to create early signals of high demand for that currency in the market.

Step 2: Pump and Maintain High Prices

At this stage, the manipulation group will deploy marketing campaigns and spread loud propaganda about the potential and bright future of the currency. They will establish forums, discussion groups to create a “crowd” effect and persuade inexperienced investors to rush to buy at higher prices. At the same time, they also buy more to push the price to continue to rise and maintain at a high level for a certain period.

Step 3: Dump and Exit the Market

When the desired price level is reached, the “whale” group will suddenly dump their entire large stock of holdings, causing massive selling pressure that makes the currency price plummet. At this point, they have realized significant profits from the difference with the initial purchase price, while small investors are pushed into heavy losses.

Related: What is Binance? Binance Exchange Review 2024

How to Identify Pump and Dump in the Crypto Market?

“Pumping” and “dumping” in the cryptocurrency market is a speculative strategy aimed at unethical profits that large investors often apply. New investors need to be vigilant and timely identify the following signs to avoid being exploited:

• Sudden and Unnatural Price Increases: If a previously little-known cryptocurrency suddenly experiences continuous, skyrocketing price increases within a few hours or days without any clear fundamental reasons, it is likely a sign of an ongoing “pump” campaign.
• Promotional Campaigns and Propaganda: Large investors often coordinate marketing efforts and spread positive information about the potential of a little-known coin. When this promotion occurs on multiple forums, reputable news sites alongside a strong price increase of the coin, it’s a sign of an ongoing “pump” campaign.
• Appearance in the Investment Portfolio of Famous Figures: If a small coin suddenly appears in the investment portfolio of a highly influential figure or is enthusiastically mentioned on technology forums, social media, this may be a tactic to attract more attention and lure investors into the “pump” wave.

Advice for Investors

Investing in the cryptocurrency market is risky and challenging, especially for newcomers. To avoid falling into the trap of “pump” and “dump,” you need to pay attention to and follow these guidelines:

• Don’t Believe in Unrealistic Profit Promises: Suspicious individuals often stimulate FOMO (fear of missing out) to deceive you. Keep a clear mind and be skeptical of overly enthusiastic invitations.
• Start with a Small Investment: As a newbie, start by investing a small amount to understand how the market operates, trades, and tricks like pump & dump. Don’t invest too much capital upfront to avoid heavy losses.
• Avoid Buying Coins that are Rapidly Rising in Price: If a coin has been rapidly rising in price over the past 24-48 hours, there’s a high chance you’ll buy at the peak. Research the project thoroughly, evaluate its development potential before investing.
• Trade Only on Reputable Exchanges: Trade on reputable exchanges like Binance, OKX, etc., to avoid the risk of scam coins. Check the origin, development team of any new coin carefully.
• Diversify Investment Portfolios: Allocate capital to 3-4 different coins to diversify the investment portfolio. Allocate 65-75% of the capital to major coins like Bitcoin, Ethereum; the remaining 30-35% for short-term trading.
• Carefully Evaluate Investment Groups: Many pump & dump groups aim to make unethical profits. The market is always unpredictable, so manage your risks.
• Although some traders profit from pump & dump, they are the minority. For newbies, the likelihood of loss is very high if you participate. The safest option is to stay away from these unethical speculative behaviors.

Conclusion

Through the article “What is Pump and Dump? What Should You Do When This Phenomenon Occurs?” have you understood and known what to do when the pump – dump phenomenon occurs? If not, leave your questions in the comments section below to get answers immediately!