There is a lot of talk about the recent pump and dump phenomenon in cryptocurrencies. In this article, we will explore what it is, how to identify them, and why you should avoid them.
The how to spot a pump and dump before it happens crypto is a guide that will teach you how to avoid investing in cryptocurrencies.
Some people believe that ‘pump and dumps’ is a good method to become wealthy fast. Don’t be fooled by the ruse and the promise of ‘easy money.’ We’ll explain what “Pump & Dumps” are in the bitcoin market, how they operate, and why they’re a fraud in this post.
What is the difference between a pump and a dump?
A ‘Pump and Dump’ is a kind of market manipulation in the bitcoin space. A group of individuals join together with the aim of artificially inflating the price of a cryptocurrency fast (the pump), then selling the coin to naïve speculators in large quantities (the dump). Others who purchased cheap and sold high profit, while those who bought at the top lose money during the ‘dump.’
These ‘Pump and Dump’ groups typically form on messaging applications like Telegram, with the organizers selecting a currency and scheduling a time for the group to pump.
This kind of conduct is prohibited on a regulated stock exchange. Due to the absence of regulation in the bitcoin sector, these types of scams have thrived and have become very prevalent.
Pump and Dump Groups’ Internal Workings
There will be an inner circle of organizers for each Pump and Dump organization. These are the people in charge of:
- Adding additional people to the group.
- Choosing a manipulable coin.
- Choosing a short transaction in which the activity will take place.
- Organizing the ‘Pump and Dump’ and providing the group instructions.
In the scheme, there are two types of people.
There are only two kinds of individuals in any Pump and Dump group.
- Those who have been victims (who are very likely to lose money).
The decision-makers are the organizers, and they are always successful in making money from these scams. These individuals have plenty of time to purchase the currency they want to pump, but at a bargain price. They are the ones who hold all of the cards and make all of the choices.
The paid inner circle has a high probability of succeeding at ‘Pump and Dump.’ However, even a minor internet connection failure during the distribution of information may cause you to miss the boat. The compensated inner circle typically does not have much time to respond to the organizers’ choices.
The knowledge is then passed on to the inner circle. Exchange graphs, on the other hand, are likely to indicate that the cryptocurrency’s price is rising. As a result, attentive members of the outer rings may be able to get knowledge faster and purchase the coin at a cheaper cost.
The last circle is the last to learn about the pump and, as a result, has the smallest chance of profiting from the plan. Indeed, just 15% to 10% of participants in the outer rim and final circle (the bulk of the group) are able to make a profit, according to estimates. That’s correct, between 85% and 90% of them will lose money!
Figure depicting the proportion of successful transactions by group member. https://bitfalls.com/source/
Stage 1: Marketing Operations
The first stage is to get the word out to as many people as possible. In the group conversation, the Pump will be announced. Fortunately, the organizers are generally considerate and construct a geo-targeted countdown timer for these aspiring pumpers. This implies that, regardless of their time zone, all group members will know when the activity will take place.
The exchange where the pump will take place will be disclosed as well. The kinds of cryptocurrencies that ‘Pump and Dump’ organizations often target aren’t listed on reputable exchanges like as Binance. As a result, smaller exchanges like Cryptopia see the greatest activity. TotalCrypto refuses to produce material for these kinds of exchanges because of this.
The coin will not be made public until the very last minute after the pump has been declared. The bitcoin exchange where it will take place is just being disclosed now so that individuals may register and send money.
Stage 2: The Clock Starts Ticking
When the countdown begins, members of the group begin setting up accounts on the selected exchange and sending money to it.
When it comes to a ‘Pump and Dump,’ time is money. A few seconds between the announcement and the purchase of the coin may be the difference between winning and losing. Members of the group typically use this time to check their internet connection and shut off any applications that may slow down their computers.
The guys that take pumping and dumping very seriously don’t place their own orders. Instead, they purchase and trade the currency using computer programs (therefore saving a few crucial seconds). If you still believe participating in these scams is a smart idea, keep in mind that you’ll need quicker reflexes than a machine.
The Pump Begins: The Final Countdown
Finally, the organizers will name the cryptocurrency they want to pump. These are sometimes stated in three separate lines. You may wonder why. It’s for the purpose of preventing individuals from copying and pasting the coin’s shorthand into their bot. Talk about Pump and Dump companies behaving in a “fair” manner.
Most coin reveals also include a ‘goal’ so you can tell if you’re pumping too hard. It’s no surprise that pumps virtually never reach their intended destination. Would you actually purchase the coin if the target was there in front of you?
Let the dumping begin!
By now, the pump should be apparent on the exchange and Coinmarketcap.com, and the coin should be among the day’s top gainers. The price increase may lead naive investors to believe that the currency has revealed big news. These individuals purchase the currency at an artificially high price because they are afraid of missing out. The participants who refuse to participate are the ones who suffer the most loses.
Image courtesy of Coinmarketcap.com.
When the mass sell-off starts, panic sets in, and all scheme participants attempt to get out as soon as possible. After then, the coin’s value plummets to nothing.
What Is Happening in Practice?
Simply put, the organizers are purchasing coins on the cheap and selling them to their organizations’ outer ring members at exorbitant rates. Pump groups are generally free to join, but this is the real cost of participation.
To make matters worse, the organizers of the groups applaud their respective groups after the dump, much like a fox praising a chicken on its deliciousness.
What is the maximum size of a pump?
E-Coin had the biggest pump of all time on February 6th, 2018. E-coin was selling at only $6.06 per coin at the start of play on the 6th, with a 24-hour trading volume of $1,269 and a market value of $30.1 million.
Image courtesy of Coinmarketcap.com.
A pump and dump operation managed to artificially manipulate the price of E-Coin in less than a day to:
- The market capitalization is $1.44 billion.
- The cost of a coin is $289.34.
- To bring the currency to a market value of $1.4 billion, just $40,000 in trading volume was required.
- On Coinmarketcap, E-Coin cracked the top 20.
What Caused E-Coin To Be Pumped?
The way bitcoin market capitalization are computed is exploited by pump and dump organizations. The formula is easy to remember:
Market cap = price (at which the currency was last traded) * coin supply
Pump and dump schemes should avoid cryptocurrencies with large trading volumes. The reason for this is because changing the price requires much too much money.
Image courtesy of Gdax.com
The Bitcoin/USD market is seen in the illustration above. You can see that if you wanted to raise the price of Bitcoin by $1, you’d have to pay $244,000. This is why these organizations target currencies with little trading volume; moving the price with a small quantity of money is simpler. Only $1.2k in trading volume was reported just before E-push. Coin’s This implies that even if you threw $1,000 at E-coin, the price would change, while this is not true for bigger cryptocurrencies.
Image courtesy of Coinmarketcap.com.
As members of a group buy a coin at an ever-increasing price, the market capitalization rises. The sad reality about E-Coin is that many individuals undoubtedly bought it at its peak after watching it climb to the top 20 on Coinmarketcap and assuming it was the next great thing. After all, with a market value of $1.4 billion, how terrible can a coin be?
The unfortunate reality is that the market cap of tiny coins may be readily manipulated. Pump and dump schemes rely on bitcoin buyers’ emotions. No one likes to lose out on the next great thing, and large pumps artificially instill this anxiety, which we believe is why so many people purchased E-Coin on February 6th.
Other Techniques Used By Bad Actors To Pump And Dump Cryptocurrencies
Pumpers who are serious about their currency go to great efforts to generate interest in it. They would sometimes disseminate false news about the currency to be pumped via social media, forums, YouTube, and blogs. Fake screenshots of developments, collaborations, or exchange listings are examples of this. This deceit may begin weeks before the pump is turned on. The goal is to establish a buyer’s market for the currency after it has exploded in value. These people will, understandably, believe that the false news is true and that the currency is headed for the moon.
Organizers of Pump and Dump groups may be astute. Before making any investment choice, it is essential to thoroughly examine every piece of news, to only utilize reliable sources, and to cross-reference. There are always alternative options; don’t feel obligated to make hasty choices, and don’t allow schemers take advantage of your emotions.
What To Look For When Seeing A Pump And Dump
Always keep an eye on the volume of cryptocurrency trades. Legitimate cryptocurrency projects often trade in the tens of millions or even hundreds of millions of dollars each day. This kind of transaction volume can’t be faked by any pump and dump operation.
Image courtesy of Coinmarketcap.com.
When we look at E-Coin in the month leading up to the pump, we can find that the largest 24 hour trading volume was less than $6,000. If you see a significant spike in trading volume and a sharp rise in price, it’s likely that the currency is being pumped and dumped. It only took $40,000 to move E-Coin from a $30 million market value to $1.4 billion, as seen below.
Are they a rip-off?
In summary, yes, pump and dump schemes are deceptive, and the odds are that you will lose unless you are the scheme’s genius.
What’s more, some of these organizations are impersonating genuine businesses that provide a vital service to consumers. CryptoCalls Elite has gone to great lengths to produce a professional-looking advertising film in order to attract new members.
Don’t be seduced by promises of quick and easy money. Like a pyramid scheme, pump and dump organizations are a way for organizers to benefit from their members.
Pump and dumps are prohibited in regulated places like the stock market for a reason. They are not only dishonest, but they also damage many of the scheme’s members. The pump’s allure seems to stem from:
- The allure of quick cash.
- The sensation of being a part of a plan as an insider (when really you are the intended victim).
- Preying on herd mentality: “If everyone else is doing it, I should, too.”
If you’re new to the bitcoin industry, all you need to know is what a pump and dump organization is. If you still want to participate, it is entirely up to you to make that choice.
Instead of thinking about pump and dumps, maybe it would be a better use of time to look at genuine ventures…
DISCLAIMER: The activity of the cryptoassets discussed in this paper is uncontrolled. This post is not intended to provide financial advice. Always do independent research.
The crypto pump and dump groups 2021 is a phrase that investors use to describe the action of buying into a coin or token, then selling it for profit.
Frequently Asked Questions
Is pumping and dumping crypto illegal?
Pumping and dumping is not illegal in itself, but it can be considered fraudulent or deceptive. For example, if you buy a stock at $100 and then sell it for $200 within minutes, that would be considered pump-and-dump.
Why is pump and dump illegal?
Pump and dump is illegal because it is a form of market manipulation.
Can you make money from pump and dump crypto?
No, pump and dump is illegal.
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