What are Pump and Dump? Signs of Pump and Dump
- 1. What are Pump and Dump?
- 1.1 What is Pump?
- 1.2 What is a Dump?
- 2. Pump and Dump Example
- 3. Why Pump and Dump
- 3.1 FOMO
- 3.2 Liquidity
- 3.3 ICO
- 3.4 Legal Framework
- 4. Understanding the Pump and Dump process of the "sharks"
- 4.1 Step 1: Collecting / accumulating Token
- 4.2 Step 2: Hold Price and Pump
- 4.3 Step 3: Dump and exit
- 5. How to determine Pump & Dump
- 6. The mechanism of operation of the Pump and Dump
- 7. Is Pump & Dump group simple to operate?
- 8. Are Pump and Dump legal?
- 9. A few tips to avoid becoming a victim of Pump & Dump
Pump and Dump are known to be highly high-risk scalping investments. If you are a newcomer to this market, it is easy to become "prey" for the "sharks". So in today's article, BHO Network will help you learn in detail about two phenomena Pump and Dump. Let's follow along!
1. What are Pump and Dump?
To understand precisely “what are Pump and Dump”?, you should first learn about the definitions of these two words. Specifically as follows:
1.1 What is Pump?
Pump or “pump” is a term or a code that refers to the purchase of a large number of tokens by some object. This action is intended to push up the price and demand of cryptocurrencies. Tokens selected for Pump usually have a low starting price, low popularity and small capital.
Understandably, the "shark" (Trade Coin) will proceed to buy a large number of specific Tokens with low value. They wait for the right time and make the price push to the top to "trick" amateur traders into investing. Then, they dump Tokens to the lowest level, even zero.
1.2 What is a Dump?
Dump means "discharge" in Vietnamese. The term refers to the “shark” that begins to release Tokens after the price pump. Trade Token will be sold large quantities to profit from the price difference. You need to pay attention, people with profiteering schemes will seek and take advantage of loopholes in the supply and demand changes of the cryptocurrency market. From there, individual investors believe this is just a normal price movement phenomenon.
In summary, Pump and Dump is the work of one or a group of investors colluding to pump the price of a Token up and attract new investors to jump in. Then, they made a continuous sale, causing the token price to drop rapidly. This allows that initial group of people to profit quite a bit from the sudden price increase.
People who can perform this behaviour are usually organizations and individuals (called "sharks") that own a large amount of capital. When they hold many Tokens, they can easily navigate the market however they want.
In other words, Pump & Dump manipulates the cryptocurrency market schemes Pump and Dump that can last only a few minutes but significantly impact the price and volume of a Token.
2. Pump and Dump Example
If you are involved in cryptocurrency investing, you must have heard of the Pump and Dump event in May 2020. Specifically, a small Altcoin that almost no one knows named Tierion has done this.
On May 12, 2020, Tierion conducted a Pump increase from $0.05 to $0.11 (more than 45%). Then, on May 22, 2020, the Token price was dumped to only $0.03. Even that price was $0.02 lower than the initial capital he spent.
However, when digging deeper into this phenomenon, one does not see anything special about the Token coin or the project of Tierio. Tierion. They only saw a few good rumors on the social network Facebook.
3. Why Pump and Dump
Every plan is built for a reason, Pump and Dump. This phenomenon has become famous for some reasons:
FOMO (Fear of Missing Out) is an effect of fear, fear and regret when people miss an opportunity. This is considered an important factor promoting the development of Pump and Dump.
For example, when the price of Token is pushed up, the task of the "shark" is to do everything to convince investors. They will tell them that they will miss out on their super profit if they don't invest in this Token immediately.
Until amateur investors saw more and more buyers, the price of the Token increased rapidly. They began to feel regret and the Fomo effect was created. Regret makes them fall into the nets of "sharks".
Most "shark" investors in the cryptocurrency market have more capital than the daily trading volume. Therefore, they need to be as liquid as possible.
Only then will they be able to reap profits quickly. To achieve its ambition of liquidity, the “shark” needs to create a Pump & Dump.
The “sharks” will always find a way to Pump and inflate prices through ICO activity. This process is often supported by some famous people in the crypto world. After some time, when the price has risen as planned, the group behind it will start dumping causing small investors to suffer heavy losses.
3.4 Legal Framework
They are punishable by severe punishment in traditional markets. This illegal action, also occurs in the stock market, gold, but the securities market is protected by law and not with cryptocurrencies, so be careful in investing in these coins. small with new people.
However, most countries today do not have a formal legal framework for cryptocurrencies. As a result, the Pump & Dump trick is used freely. Since then, it quickly became a lucrative bait for "sharks" without worrying about being prosecuted by law enforcement agencies.
Read more: What is Gas fee? What you need to know about Gas fee
4. Understanding the Pump and Dump process of the "sharks"
Usually, the implementations Pump and Dump will be go through 3 steps. Specifically as follows:
4.1 Step 1: Collecting / accumulating Token
It takes all, to manipulate the Token price, the "shark" needs to own a large amount of that Token. As mentioned above, large investors often collect tokens to facilitate price control and manipulation.
However, collecting Tokens is not easy. "Sharks" often have to perform for a long time. They must collect in small batches to avoid accidentally increasing the Token price.
If you want to know how “sharks” collect Tokens, please continue to refer to the content below.
Ways to collect Tokens through direct trading channels: “Sharks” will buy Tokens through Miners, investors who have left the project or buy directly from the founding team of that Token. Because, buying directly in bulk, the coin price will be much lower than the market price.
Token mining method: “Shark” performs early Token mining or buys Tokens from the first rounds. However, this way of collecting Tokens is hazardous because it is not always possible to collect potential Tokens.
4.2 Step 2: Hold Price and Pump
After buying a large enough amount of Tokens, the “shark” will focus on releasing news to attract the attention of ignorant investors to FOMO at a high level. expensive. They start on forums, Groups or Chatboxes on Facebook, Telegram, Discord,... Where there are a lot of investors to discuss the Token they just bought.
“Shark” can use many Clone accounts to create the most natural feeling. The good news about the Token will be released by them continuously. At the same time, optimistic predictions of that Token will also be updated regularly so that people rush to buy and the price will be pumped up.
The price push process is speedy and there seems to be no adjustment. to create large FOMO. The common feature of the Pump Token is that everyone is optimistic about the future of the Token coin to the point of absurdity. This is also when many investors think about Hold To Die the most.
4.3 Step 3: Dump and exit
After completing the above 2 steps, there will be the final stage where the "sharks" sell and make a profit. At this time, the price of the Token will stop increasing and the transaction volume will decrease. The "sharks" had earned enough money they needed and escaped safely.
From there, panic will begin to emerge. Token price is continuously falling to the bottom quickly. Pump & Dump victims constantly look for sellers to save what is left.
5. How to determine Pump & Dump
There are quite a few ways to determine if a Token has a Pump & Dump or not. Ensure you know the following methods to avoid being trapped by "sharks".
- The simplest way to identify a Pump & Dump is when an anonymous token suddenly increases in price without any credible explanation or announcement.
- When you notice paid articles about a token associated with an increase in media activity around a particular crypto project. Be careful as this could be a sign of a Pump & Dump.
- If a token with a market capitalization of only a few million dollars suddenly appears on all sites like Twitter, Facebook, Telegram or Reddit, you also need to be cautious.
- Always be on the lookout for promises that you can double your money quickly when investing in a specific Token. Because this may be false advertising made by people involved in Pump & Dump.
6. The mechanism of operation of the Pump and Dump
Pump & Dump groups will often appear on social networks. Which is mainly on Telegram's platform channel. Here, pump discharge groups can contain several thousand to tens of thousands of participants.
Accordingly, a type of Token when Pump & Dump is selected will be notified by the Admin in the group. Members will conduct exchanges and buy and sell together a few minutes later. Fake news about this coin has even spread widely on social media, Blogs and news sites that are said to have a reputation for sponsored content.
7. Is Pump & Dump group simple to operate?
Plan groups Pump and Dump always have a leader or administrator and membership hierarchy. If you are a higher level member, you will be exposed to pump signals earlier than a lower level member.
Through this, you will always have the opportunity to buy at a lower value and make more profit when conducting pumping operations. However, the time advantage at higher levels usually only lasts about 3 to 8 seconds. You can upgrade by introducing new people to the group. The more new members you add, the higher your rank will be.
Small note: You need to remember that there is no profit sharing without a purpose, pay attention to the signals as soon as a group of people come to you to share high profits for unknown reasons.
Read more: What is Sidechain? Learn how Sidechain works
8. Are Pump and Dump legal?
Pump & Dump is an illegal and tightly regulated act for traditional financial markets. In the United States, market manipulation can be punishable by imprisonment according to the Securities Act of 1933. In Vietnam, the Penal Code also stipulates the crime of manipulating the stock market with frames. The maximum penalty is 7 years in prison.
In the cryptocurrency market, law enforcement agencies are always trying to intervene and prevent price manipulation but to no avail. For example, the case of John McAfee happened in 2017, 2018.
At that time, he promoted a new Token daily on his Twitter. However, he did not reveal to his followers that he bought this coin before posting the Tweets.
Specifically, it is Tokens like Dogecoin, Reddcoin and Verge. McAfee's actions have accused the CFTC of commodity and securities fraud, wire fraud, and money laundering. This is also the first time the CFTC has taken action against those involved in the crypto Pump & Dump scheme.
However, so far there is no precise regulation on this behaviour. Besides, the "sharks" on Telegram or Twitter can use anonymous IDs to avoid being tracked by law enforcement. Therefore, manipulations of the cryptocurrency market are still occurring regularly without being dealt with.
9. A few tips to avoid becoming a victim of Pump & Dump
You need to invest in the cryptocurrency market. However, you are pretty worried that you may be led and become a victim of Pump and Dump. Understanding this, BHO has compiled some tips to help you avoid the most effective Drain Pump trap.
- Always do thorough research on the Token you intend to invest. Includes information about the white paper, creative team, project application, strategic partner and other background information. This will help you have a basis for evaluating whether the Token has potential or not. From there, you can quickly detect unusual fluctuations.
- Limit investment when there is FOMO mentality. It would help if you kept in mind that the cryptocurrency market has a lot of potential and safe tokens. Opportunities always come your way. Therefore, be careful when making investment decisions!
- Make a plan for effective risk management and capital management. Market volatility is normal and you don't need to worry too much. Take the time to plan for the upside/down situation and the appropriate capital ratio. This can help you avoid losing profits on your investment.
- Be careful when investing in coins with a large market cap, reputable development team, and high adoption.
- In addition, you need to pay attention, Pump & Dump often occurs with coins with poor trading volume and liquidity. Avoiding such Tokens will help you limit many of the risks of becoming a victim of dumps.
- Finally, you should not rely too much on the investment advice of investors on social networks or in heavily advertised articles.
- If you are new to investing, you should divide the % of capital for several different coins, which, divide a significant % (60-70%) to hold strong coins such as BTC, ETH, BNN, SOL.... The rest is used for trading in minor currencies.
- What is Sharding? Sharding's potential challenges and risks
- What is Solidity? Everything you need to know about Solidity
Above is the basic information about Pump and Dump and how to identify bad tokens in the cryptocurrency market. Hopefully, the article will help you protect your capital and maximize your return on investment. Don't forget to follow BHO Network to update more knowledge about Token!
Published on August 10, 2022
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