What are Pump and Dump? Why is it dangerous for beginner traders?
Pump and Dump are probably the two terms you often hear when participating in discussions at trade coin groups or cryptocurrency communities, even some groups created just for the purpose of playing pump and dump coin. Pump and Dump in trade coin is a form of extremely risky surfing investment, if you are a newcomer without knowledge, it is easy to become a prey for sharks.
What are Pump and Dump?
Pump and Dump in the cryptocurrency market, especially trade coins, are interpreted as manipulating the market, “bidding prices”, “pumping prices” of a certain coin up (Pump), and then constantly selling to bring the price of coin down to a terrible level (Dump) which is even lower than the beginning of the pump. The Pump and Dump action is very common in markets such as stocks, forex or gold, not just in cryptocurrencies.
They are actually an illegal action, however, if in the traditional market such as securities investors, traders are protected if they become victims, then on the cryptocurrency market is absolutely not, because cryptocurrencies in most countries do not have a legal framework. Therefore, when investing in the cryptocurrency market, investors must have the knowledge to protect themselves against such Pump and Dump waves.
Pump and Dump are usually done by organizations, “shark” groups (only those with large capital) or whales (only those with super large capital). When they hold a large number of coins or a large budget, they can navigate the market in the direction they want, in other words, it is called market manipulation.
Pump and Dump groups on social media hunt newcomers
In each country, there are many pump & dump groups on social media such as Telegram or Facebook created by sharks to fool newcomers to make profits. Newcomers are inexperienced traders, and eager to profit immediately.
These groups regularly post pictures of pump coins and attract people with profits of 20%, 30%, even 50% in just a few minutes. For the first time, they let the newcomers made a little profit, but the more they follow, the more money they lose.
How did the shark and whale create a Pump and Dump?
First, the owners of these Pump and Dump coin groups will select a market capitalization coin combine with a small volume of trading volume (also known as “junk coin”). Small coins become the most targeted because they are easy to bid prices, while popular coins like BTC, ETH, XRP, etc. need a huge amount of capital to do it. Next, they will start buying slowly to store and then they push the prices up.
Once they have bought a large enough amount, they start spreading the news to Telegram or Facebook groups, the group usually has two types: “free” and “paid”. Of course, the contract will be given to the group paying to buy, at this time group owners can sell a small amount first to reduce risk.
Finally, they spread the news to the free groups, at this time the coin price pumped a pretty big green column which immediately attracted the attention of the members. The FOMO syndrome began to appear and people will constantly buy. In the meantime, the owner and the paid members have started to sell out, and when the pump stops, they discharge in bulk, causing a sharp dump price.
This process can take a few days, hours, and even minutes. As the chart below, a small volume coin on Binance in less than 1 hour but two green and red columns are almost the same. If you bought the right peak, the money spent when you bought, it would be never to get back.
Some tips to avoid being a victim of Pump & Dump
- If you are a newcomer, you should not buy many small-sized coins. You can follow these groups to understand the pump and dump mechanism. You can spend a small budget to have experiences.
- You should not buy coins that have already pumped a few green columns, especially small coins, because of the high probability that you will buy at the highest peak.
- Choose a well-known exchange to avoid junk coins, usually shark groups will choose the small volume floor which there will be more junk coins to make Pump and Dump easier. So, choose big exchanges like Binance, Huobi, OKEx, … of course, these exchanges will still have garbage coins and be priced, but very few.
- Never “all-in”, mean that never invest all in a coin, but should allocate capital to 3-4 coins, for example, 60-70% of the capital should hold Top coins like BTC, ETH, XRP, etc. The remaining 30% is for trading, thus reducing the risk of investing.
- Do not be “tempted”, you will often be added to the Pump and Dump groups on social media and often receive notifications of group profits, but do not rush to follow the deal, because almost no one shares it. benefit without purpose, maybe they will give you a rafter 1.2 times, but then lose more than win, this is called “raising fat and meat”.
- Knowing how to select groups to join, Telegram has an annoyance that you will automatically be added to the groups, to avoid this, you should set up so no one can add without your consent. (This is your own curious). Of course, there will still be “quality” groups,
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