More and more people become involved in cryptocurrency world and because there is so much hype, many new adopters get interested not in the technology itself but trading and speculation. People expect quick money and they are easily persuaded about rising prices. Big whales (traders with big financial capital) speculate the price in the market because there are almost no regulations from the governments. Consequently, one of the biggest threats in the market is – pump and dump scheme.
In definition, the Pump and Dump scheme is when a person or a group decides to buy a big quantity of low-volume coin and the price increases a little bit. They have a lot of accounts in different cryptocurrency channels where they start to promote that coin at the same time. Promotion includes telling that there’s big news coming up and that the people in the group have an insider’s information on that. People start buying that coin believing they can catch the growing price. Value is rising and the leader of the group starts selling his capital, while newbies are buying it with a higher price from him. Therefore, everybody sees that price starting to decrease and the majority begins to do panic selling and then the price drops down very quickly. There is a picture below, where you can see a typical pump and dump scheme. This example is of Mesa Energy Holdings in Nasdaq stock market, but the same charts are appearing in the cryptocurrency world as well. As described earlier, you can see 3 phases of this scheme:
1. Accumulation of the asset
2. Pumping the price
3. Dumping the price
If you see the spikes on the chart, you have to check why it happened and all the reasons behind that. Nowadays, there are plenty of sources where you can check the certainty of the company and all announcements they have made. Don’t be fascinated by VIP pump and dump telegram groups, where you can get “benefits” from there, though the real value is only for the owner of that group, who is trying to get money from pumpers. Golden rule is – don’t invest your money unless you do your own research. The main aspects of the research should be – what is the product behind the coin, who are team members, etc.
There are plenty of ICOs, where the team manipulates price using their own traders. These traders are trying to make higher price and make the bigger growth in a short period of time. Usually, newbies don’t look deeper in the technology, but just takes a look into the charts and starts buying a coin even if it is an unknown coin.
Hopefully, this video was useful and educated you how to avoid pump and dump traps. We want to make sure that our community is educated and aware about existing traps in the cryptocurrency ecosystem. Keep in mind and try to make your own research and get to know as much as possible about a product and the team behind the product.