Together with the JPKTraders group, we are starting a new series dedicated to security in the cryptocurrency world. Today, we are taking a closer look at the popular phenomenon of market manipulation – Pump and Dump.
Together with the JPKTraders group, we are starting a new series dedicated to security in the cryptocurrency world. Today, we are taking a closer look at the popular phenomenon of market manipulation – Pump and Dump.
The world of cryptocurrencies, thanks to the lack of regulation, gives a lot of freedom and liberty. However, what is a great advantage here, for many, especially new users, carries many dangers. For example, on traditional markets, manipulation of the exchange rate is illegal and prosecuted by law. In the world of cryptocurrencies, manipulation is unfortunately (or fortunately for some) common and brings together many groups that specialize in it. This mainly concerns new cryptocurrencies or tokens.
Below is a description of the Punp and Dump phenomenon and some advice for new cryptocurrency users from the JPKTraders group.
PUMP AND DUMP
FRAUD, MARKET MANIPULATION, OPERATION PLAN
If you are even slightly interested in cryptocurrencies, and given the recent increases, it is quite likely, you have probably encountered the phenomenon of market manipulation. The growing market and increasing popularity of cryptocurrencies mean that there are more and more scammers who shout about their alleged profits. There are people who claim to have made thousands of percent in a few months and cryptocurrencies made them millionaires overnight! So you can easily believe that cryptocurrencies or a particular cryptocurrency will make you millionaires.
What is Pump and Dump?
Pump and Dump is a specific market manipulation scheme, which consists of a rapid increase in price and sales at the peak of currency popularity. In the case of large cryptocurrencies such as Ethereum or Bitcoin, this is extremely difficult due to the huge capitalization and therefore the huge financial outlay needed to manipulate the rate (or authority and media clout will be enough). However, there are hundreds of tokens with a capitalization of less than several million dollars. In their case, it is much easier to obtain a large amount of currency in order to start manipulation.
How does Pump and Dump work?
As with any market manipulation, there are two groups of people. The first are the insiders who promote the asset and want to get the second group to buy while they sell to them. A very well-known way to create a group of insiders is to create a Pump and Dump group.
Pump and Dump groups are semi-private channels like Slack or Telegram that allow users to plan in peace and quiet away from the public. You can sometimes see them advertised on more public channels like Reddit, but insiders generally don’t promote themselves at this stage. In the meantime, they’re buying up the chosen currency at a low price.
The “fun” begins
Once insiders have purchased a sufficient package, things start to get noisy. Very noisy.
They start promoting the cryptocurrency, saying that this technology has real potential, has facilities that no other has and… the price starts to rise! Users outside the original group start to notice the token and buy it, the spiral is on. Since the capitalization and market depth is low, it doesn’t take much activity to drive up the price.
The capitalization of such a cryptocurrency will increase even a dozen times in a few days, causing the market to temporarily soar to the proverbial moon, which attracts even more new investors. Many of them will start promoting it on their blogs, adding even more credibility to the rapid price increase.
Profit realization
The time has finally come for insiders to liquidate their assets, selling quietly while still advising others to buy. After a group of insiders has gained 10x or more of their investment, they often simply disappear with the realized profit.
Then the price falls as quickly as it rose. Many of those who bought at the top will be left with declining cryptocurrencies. They are the real targets of the insiders, having bought back cryptocurrency at 10 times the price that is actually worthless. After such a pattern of rise and fall, it is rare for a currency to rise again, becoming a forgotten “zombie” currency.
How to recognize a Pump and Dump pattern?
The reason investors fall for this pattern is that a dozen or several dozen percent increase in price is not unheard of in the “crypto world.” Examples include Ethereum and Dash (though the increase was largely fundamental). There are key differences that can be seen before investing in something worthless.
Long period of inactivity before a sudden jump
Significant price increases are nothing special, however, in the case of Pump and Dump, trading before the increase is usually almost non-existent and characterized by low volume. For example, the Ethereum chart showing the situation before the sudden increase.
Even though the volume before the spike was quite low, it was a fairly active market, with lows and highs. Let’s compare it to ChainCoin, a well-known Pump and Dump cryptocurrency.
There is almost no activity before the July 8 spike. Ethereum had an active market that was growing stronger, while ChainCoin trading was almost non-existent and the spike in activity was sudden. Zero volume is one of the telltale signs of a Pump and Dump.
A very little known token outside of one or two channels
If you’re new, it’s hard to find good sources of crypto knowledge. However, if you do some research, you’ll find many communities on channels like Reddit, Telegram, Slack, and even IRC. Even smaller cryptocurrencies like Nexus have thousands of users on Slack, Reddit, and Twitter.
In the case of Pump and Dump, insiders have one channel for sharing information (Telegram group, Slack channel or YouTube) and people sharing knowledge in other crypto groups. So there will be a lot of activity focused on the main group and minimal information in a few others.
If you find that you cannot find information regarding your investment among other communities, it is a sign that the group (insiders) has not existed for very long.
Immediate and sharp destruction of any criticism in the bud
Cryptocurrency users are not known for their humility, but even in places like the Ethereum subreddit and Bitcoin forums, there is a fair amount of debate and argument. Since Pump and Dump groups rely on momentary hype, even one differing opinion can disrupt the group’s chosen path. In this case, insiders will start attacking the rebels until they leave or get banned. If the group is not creating honest debate, it is a bad omen.
Beware of clones. Know the exact characteristics of a potential investment.
Before investing your money in a given investment, you should always familiarize yourself with the characteristics of a given security. In the case of buying shares, investors look for fundamental indicators, read the prospectus and company risks. When investing in cryptocurrencies, we do not have a universal pattern, you have to search, search and search again. Sometimes we will find an interesting opinion on, for example, a little-known blog.
The vast majority of cryptocurrencies are clones of other, more well-known projects such as Bitcoin or Ethereum. Often, these cryptocurrencies do not differ from their originals in any way, or only in minor and insignificant details. Before you start investing, check what you are actually investing in. Take a close look at the characteristics of the currency and how it differs from others. Try to assess whether these changes (if any) can actually be revolutionary enough for the currency to be successful. In 99% of cases, unfortunately, this is not the case, and new cryptocurrencies fade into oblivion after months.
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In order to warn each other about fraud and scams, join the Kryptowaluty – Oszuści group (https://www.facebook.com/groups/275810916244743/), which is a grassroots initiative of the cryptocurrency community.
