What Is Pump and Dump and How Does It Affect Crypto Market?

What Is Pump and Dump and How Does It Affect Crypto Market?

Cryptocurrencies have been growing in popularity with a rapid speed in the past few years. We have seen it reach very high peaks, but we have also seen lows, such as the market crash that happened at the end of 2021. Despite these harsh market conditions that continued into 2022, cryptocurrencies are still going strong and for now they are back on an upward trajectory. 

This growth has created many opportunities in many different fields, but it has also given people the ability to abuse this volatile system and make quick cash grabs. There are numerous crypto scams out there and one of the most notorious among them is pump and dump schemes, which has caused many unaware investors to lose quite a lot of money in the hopes of scoring big. But what exactly is this so-called “pump and dump” scheme and how are so many people falling for this iti?

What affects crypto prices?

Before we take a look at exactly what pump and dump is, first we need to understand how cryptocurrency prices work and what affects these prices. Cryptocurrencies are speculative assets, not backed by anything. What this means is that their price depends on the demand and peoples belief in these tokens. In comparison, assets such as stocks are backed by companies and you can easily judge how much stock is worth, based on how the company is performing and the assets they hold. 

On the other hand crypto prices are purely speculative and they depend on what people think will happen to the token in future. If a large number of people are interested in a certain crypto and think that the price is going to go up, they buy this token and prices start to go up as more people are buying than selling. If people think that price has reached its peak and it is going to go down, they start selling, and thus prices start to fall. As you can see, this is a very speculative system that is not based on any hard facts, which is exactly what makes cryptocurrencies so volatile. Because of this, it has also made it much easier for people to manipulate crypto prices, as they can simply create false narratives and manipulate prices as they like. This is the MO of pump and dump schemes, now let’s take a look at this in more detail.

What is Pump and Dump

As we mentioned before, pump and dump is a scheme where people use different means to manipulate the price of cryptocurrencies and then profit from it. This is a complex and yet simple scheme to pull off if you have a large enough platform to communicate with people and create a false narrative.

Pump and dump schemes first start with pumping. As the name suggests this is a process where prices are being pumped and they are given false valuation. To do so, different scammers take different approaches, some people create cryptocurrencies and then start promoting it through different means, such as social media, influencer marketing, and so on. There are also people who look for online trends and then create cryptocurrencies based on those trends. Once word gets around that there is a certain crypto associated with a trend, for example a meme, some people start to buy it as a joke. This increases the price slightly but if word gets around that prices increased, more people start to buy this token, pumping its value even higher.

Once the price has reached a certain point, the people behind this scheme will move to dumping. Before these scammers start pumping prices they usually buy big quantities of this cryptocurrency, or if they are the creators, they simply keep a large number of tokens to themselves. Once they move to the dumping phase, they start selling their cryptocurrencies and make big profits since they acquired these tokens for free or for very low prices. Once this happens, prices start to fall rapidly and people start selling their cryptocurrencies in order to make profits or at least to avoid losing large amounts of money. When this mass selling happens the price of this cryptocurrencies starts to fall drastically, and in most cases, it ends up lower than it was before pumping. From this point on, this crypto is considered dead, as prices are very low and belief in this token is gone.

So once a pump and dump happens, people who were at the top of the scheme will end up with the profits. People who bought these tokens very early into the pump and kept an eye on the market will also walk away with attractive profits. But the majority of people will suffer losses, as most of them were probably victims of FOMA (Fear Of Missing Out) and bought these tokens when prices were already high. During the dump, it can take only a few minutes for prices to crash, which will leave the majority of investors counting their losses. 

How to spot a Pump and Dump?

Whenever we see that the price of crypto is rising really fast we should ask ourselves the question, “Is this a pump and dump or is it a legit cryptocurrency that has a potential future?” Answering this question in most cases is easy as most pumps and dumps share similar features that are easy to spot, if you know what you are looking for.

In order to spot a pump and dump, first look at how new the cryptocurrency is. If you spot that this crypto was just recently created and it does not have any prior history, it is most likely a pump and dump. Cryptocurrencies rarely jump in prices so fast without having any prior history, and even if it is not a pump and dump, cryptocurrencies that rise in value really fast usually lose quite a bit of value shortly after.

Another factor to consider about this cryptocurrency is its usability. Every crypto is used for something and their value is usually associated with this usability. If you are interested in a crypto that has been becoming popular, check the purpose of this crypto and how realistic the price is compared to what it actually gives us. It is also important to check if these cryptocurrencies are actually doing what they are meant to do. Some people behind a pump and dump might advertise their token as very innovative with certain functionality, but in reality it might not be delivering on promises. 

You can also look for the ways this token is being advertised by creators, if it is even advertised. Most pump and dump cryptocurrencies will try to advertise themselves everywhere they can and often take predatory approaches when it comes to marketing. They also pay influencers to promote the token, they put ads throughout the internet, and so on. This all signals the fact that the main goal of creators is to make as many people invest in this token as possible, and that they don’t care about building a community which is actually interested in this crypto. This is a sure signal of pump and dump, and it is usually advised to avoid these cryptocurrencies.

But this does not mean that there are no legit cryptocurrencies that gain value really fast. There is always a possibility that some crypto will find popularity and will rise in price fast. But the likelihood of this happening is very low, therefore it is advised to approach fast raising cryptocurrencies with caution, and never invest more than you are ready to lose. 

FAQs on Pump and Dump in Crypto

Is Pump and Dump legal?

Pump and Dump is a market manipulation scheme and it is considered an illegal activity. But despite this, the likelihood of someone being caught for a pump and dump are really low. The crypto space is largely unregulated and this gives some people the ability to bend the rules and conduct activities that go against the law and yet never be charged for anything. In most cases, only very large scale pump and dump schemes are investigated, with the majority of them not being closed and scammers are often let go with a slap on a wrist. 

Can you profit from Pumps and Dumps?

It is generally advised that you don’t invest in cryptocurrencies that you know to be pump and dumps. But, if you are still interested in this crypto and wonder if there is a way to profit from it, technically yes it is possible. When buying into a crypto which is being pumped, you can wait for a short while for a price to rise and then set stop-loss order at your entry price. From there on, you can not suffer any losses, and whenever you sell this crypto, without it reaching the stop-loss, you will make profits. But once again, it is a risky thing to do, as prices can collapse before you set your stop-loss, especially if you are buying in late.