Pump and Dump Meaning
What Does Pump-and-Dump Mean in Cryptocurrency?
Imagine a group of retailers hyping a limited edition watch, touting it as a must-have item. As the mass rush to buy it, the retailers already secretly purchased most of the watches at a lower price. Once the demand peaks, they sell their stash at a higher price. This leaves others with overpriced watches that aren’t as valuable as they were led to believe. The group of retailers technically orchestrated a ‘pump and dump scheme on the watches.
A pump and dump (PND) in crypto is a coordinated manipulative tactic. It involves a group of traders or whale(s) targeting a low-value cryptocurrency to artificially drive its demand up, and selling it once the price peaks.
The “pump” signifies the orchestrated price increase created by promoting the crypto, spreading misleading and exaggerated statements, and encouraging others to buy. The “dump” is when the bad actors sell off their crypto holdings once the price has peaked. The inflated price doesn’t normally reflect the cryptocurrency’s actual value. Once the “dumping” is over, the outcome is often a dramatic drop in price, leaving the honest investors holding the bag. The orchestrators of this ploy bank on crypto enthusiasts’ fear of missing out (FOMO) on a profitable investment.
How to Identify PND Schemes?
The crypto market is highly speculative and unregulated, making it susceptible to manipulation. A crypto rule of thumb is that “if something appears to be good to be true, it probably is.” Some indicators to spot potential crypto pump and dump schemes are:
- Lack of fundamental basis: If the price of a crypto asset rapidly increases without an apparent reason for the sudden surge, such as significant news or developments, it may be a warning sign.
- Limited information: Pump-and-dump schemes often involve relatively obscure or newly created altcoins with limited information available.
- Sudden and unexplained price spikes: A rapid and significant price increase in a low-volume cryptocurrency may suggest the signs of a PND.
- Volume surge: Sudden increase in trading activity, followed by a price spike may indicate a potentially orchestrated pump, aimed at creating the illusion of high demand.
- Social media hype: PND perpetrators are notorious for using social media platforms and online forums to create a buzz around a crypto asset. The hype is used to lure in unsuspecting investors who are seeking a quick profit.
- Unsubstantiated claims: Most pump-and-dump schemes will make unrealistic claims, such as promising astronomical or guaranteed profit as bait for unsuspecting investors.