What Are Pump and Dump in the Crypto World?

First, you need to define the terms and understand what a pump and a dump are in trading. Their definitions are as follows.

• "Pump" or pumping is a massive investment in an asset to increase its price and convince investors of growth.

• "Dump" is a mass exit of a group of investors who sell assets at the peak of the price, which provokes a decrease in value.

Thus, this scheme is called "Pump and Dump", in which a group of investors manipulate the market, make money from it, and then exit en masse, taking profits. As a result, the rest of the participants lose money.

In many ways, trading is based on the emotions of people. This is a constant struggle between "bulls" (people who buy an asset and, accordingly, push the rate up) and "bears" (people who sell an asset and push the rate down). The more trades are opened in some direction, the stronger the trend, which affects traders' psychology and makes pumps and dumps possible. This scheme works as follows:

• A group of traders agrees to buy some cryptocurrency. As a rule, it’s low-liquid, for which there is no active trading.

• Massive infusions of funds begin, which leads to a surge in the exchange rate.

• Other traders, seeing the rapid growth of the rate, are trying to "jump on the bandwagon of the train" and enter the transaction one by one. As a result, cryptocurrency capitalization is growing; the trend is accelerating upwards, and the digital asset is rapidly becoming more expensive.

• When the price reaches high values, a group of investors massively sells the asset. This is where artificial growth ends. The trend immediately sags in the direction of lower prices.

• Panic is growing among the rest of the investors; everyone is starting to get rid of the asset and sell it massively. However, it is increasingly difficult to do this due to the enormous supply and minimal demand.

• As a result, the cryptocurrency's price falls to zero or almost zero. The organizers who carried out the scheme can make a lot of money. The rest lose money.

The "Pump and Dump" scheme appeared long before the emergence of the cryptocurrency market. At first, it was used in the stock market, where the organizers used such methods to manipulate stock prices. However, cryptocurrencies are a more suitable market for this. Many low-liquid assets can efficiently be priced higher. Before a cryptocurrency pump occurs, there are usually several media publications to draw more attention to the digital asset.

We figured out what a pump and a dump are in cryptocurrency, but you also need to know about the main types. In total, there are two types of such a scheme, which are distinguished by timing.

• Short-term pump and dump. It usually takes several hours. For these purposes, the most low-liquid cryptocurrencies are chosen. Investors quickly buy them and easily increase the price with minimal investment.

• Long-term pump and dump. It may last several days. Unlike the short-term option, assets are selected from the top 20 cryptocurrencies. Including the scheme can be applied to Bitcoin or Ethereum. Such a system requires more investments from the organizers, but its possible profit is more significant since there is more attention to such assets.

Whatever the scheme, it is essential for a trader to do everything in order not to become a victim of Pump and Dump. Next, we will discuss the main ways to protect against such manipulations with the exchange rate.

Only the organizers of the scheme can make money on Pump and Dump. The rest of the market participants go with the positive sign much less often if they manage to exit the transaction in time. Therefore, it is important to treat investments with great care not to lose a large amount. Several recommendations will help you protect yourself from such problems.

• Check the information. If you see an unreasonable increase in the price of a coin, always think about why this happened. Check cryptocurrency data. Try to check all the information from the publications that you find.

• Stick to your trading strategy. Trading should always be carried out according to the strategy. You should get a clear signal to open and close a trade. Without this, you cannot start trading. Trading without a system is a direct path to losing money.

• Do not try to "have time to jump on the departing train." It is best to trade with the trend, opening trade at its very inception. If you see that the price is already increasing, do not try to open positions. In the case of Pump and Dump, it is difficult to predict where the price will stop.

Another essential aspect is risk management and money management. Set a trade limit for yourself and always trade with a certain deposit percentage. The recommended volume is no more than 5% of the amount on your account. If the cryptocurrency is little known, reducing the transaction amount to 2-3% of your deposit is better. In this case, even if you hit Pump and Dump, you won't lose too much money. And remember that you always need to stop on time. Even if the price goes in your direction, but the strategy shows that it is time to close the deal, you need to do it. This way you can keep your profit.