Pump & Dump strategy to trade cryptocurrency: features, principles of Pump creating, rules of a trader's behavior during a pump. Pump & Dump examples and tips on making money
Pump & Dump strategy came to the cryptocurrency world from the stock market. It suggests that the scheme developer chooses a low- liquid asset of stable low value and artificially inflates its cost, reaping the profits from the price increase. Some people think it to be fraud, others, on the contrary, take part in and enjoy the excitement. From this article, you will learn how a pump is organized; how a pump can be identified, with practical examples; and how a trader can exploit the pump and benefit from it.
How to make a profit from cryptocurrency Pump & Dump
Cryptocurrency is a rather new trading instrument, but the number of strategies developed is already impressive. They can be divided into three groups:
- based on technical analysis: trading according to patterns, support/resistance levels, Fibonacci;
- based on fundamental analysis: trading at the moment of forks start and finish, on the news from the developers;
- based on psychology: trading, based on understanding the reasons for market participants’ actions (“Hamsters” and “Whales”)
Pump & Dump strategy can be included into the third group; however, it should be identified separately. Many think it to be a scam. Yes, it is so, but why shouldn’t one take part in it?
Pump & Dump is a strategy, based on artificial inflating the price of a cryptocurrency through well-planned, coordinated organizers’ actions, followed by the price drop.
Pump & Dumps can be compared to HYIPs. They are also a kind of a Ponzi scheme, but it is not the reason for many people to deny participating in them. The matter is the excitement that traders enjoy no less than a successful trade. Agree, the point is not always in money, one can enjoy the process of trading, and sometimes, the emotions are sought more than the money.
Waves of excitement in cryptocurrency: How Pump & Dump works
Organizer (organizing pool) spends no effort to inflate a token’s price and push the yields, just in a few days, to 100% and more; and then reaps the profits from the price increase and enjoys the money earned.
In theory, it looks like this:
- the pump organizer (often a group of people) chooses and asset. It should be a low-cap cryptocurrency, always traded in a flat trend, so it is not interesting for investors. It should cost a few cents, being far away from the TOP ones; but it should be based on a catchy legend;
- the coin is bought in low volumes not to raise the price too early. At the same time, a well-organized marketing campaign is carried out in the media and on the Internet, organizers promote the currency, promising its incredible future yields and getting more and more people to buy it.
- at the start of the Pump, organizers invest in the tokens, so that the price will jump up. Traders, heated by the news and advertising, buy the coin out, an inflate the price even more;
- at the top of the first Pump wave, its organizers partially satisfy the “Hamsters’” demand, selling out a larger volume of tokens. The price starts decreasing;
- organizers let the price go down to the psychologically reasonable level and buys it out again, triggering the second wave of growth. Traders see the price rising and think the fall to be just a common correction;
- the second wave is usually higher than the first one, and, when it reaches its top, organizers sell out all the assets at the highest possible price; the buyers dry up and the price falls. However, the number of waves depends on the organizing group.
It is an example of a hidden Pump & Dump, when only organizing group is informed about the rise. The other market participants are used to achieve the scammers’ objectives; so, be careful when you see an unknown coin start being highly promoted, not to be hooked by manipulators;
The Internet community is glossy with the ads of numerous chats and groups, calling for joining them in order to create a pump and make money. Organizers of these Telegram-channels use the power of the dozens of thousands of their group members and often make profits from not only Pump & Dump strategy, but on the paid access to their private exclusive chats. In the stock market (that is where the strategy came from), such activities are recognized as illegal, but that can be argued. Every broker warns a trader about potential risks of losing their deposits. And every trader accepts this. People are motivated by the wish to make quick money, and if they lose their money because of the lack of analysis, knowledge and information, then, who is to be blamed then? Besides, most pump participators are informed what they take part in (I’ll tell about that further).
So, in practice, it looks like this::
1. E-Coin. Since February 6, a hardly known cryptocurrency has risen in price by 4 742%. It took the cryptocurrency start-up just a day to jump from the bottom of Top-500 cryptocurrencies by market cap and enter, first, the TOP-100 ones, and then, the Top-20 list.
It is interesting that exactly during that period, the whole cryptocurrency market featured stagnation; and bitcoin even tested a serious low, having dropped down to $6000. Converting into such a low promising currency? There is hardly any information about the coin, not to mention investors’ interest in it. It is proved by almost perfectly flat price chart during 2017, even during a high surge of the cryptocurrency market in spring 2017, nobody was interested in E-Coin.
2. Quark. It is a good example of two-wave pump, I described before.
The project itself was hardly interesting to anybody. It should be another bitcoin-like coin, but it was soon forgotten by investors, which is evident in the chart. The rise in January, 2018 is not the pump..
3. U.Cash. Although, it is not exactly the pump, this example is worth mentioning, as the price chart and traders’ psychology have the same features as the pump.
The cryptocurrency appeared less than a month ago; and, as it usually happens with start-ups, significantly grew in price in the beginning (scalpers’ attempt to exploit the interest to the new project). Then, the price crashed, followed by another wave of pump. Most projects don’t usually feature the second wave of pump after the interest has declined. Here, we can say for sure that someone (most likely its developers) used Pump & Dump tactics. Later, the coin expectedly went down in price.
Pump & Dump shouldn’t be confused with natural volatility. Here, the cryptocurrency TRON is a good example.
At first, there seems to be a clear pump, but that’s not so. Pay your attention to the fact that the coin itself is not a “spam-like” one; it is included into top-20 cryptocurrencies by market cap. To pump such cryptocurrency, that is to deliberately influence its rate, a lot of money is needed; and institutional investors (“whales”, like cryptocurrency exchanges and mining pools) work according to completely different schemes. Another point is the fact the cryptocurrency was growing in price along the rise of whole cryptocurrency market that passed through the level of 850-billion capitalization in early January, 2018.
Pump & Dump features
It is relatively simple to identify Pump & Dump: price jumps have no fundamental reasons and are not in sync with the general cryptocurrency market trend. Long-term investors are not interested in projects with capitalization of some tens thousand USD; so these start-ups are the most interesting for pumpers.
Features of Pump:
- sharp price surge and multiple ask orders without any significant fundamental reason;
- the quotes grow on a single platform, without any rise on other exchanges;
- ads and tips to buy the cryptocurrency on the Internet chats, forums and social communities.
Organized Pump & Dump has picked up popularity recently. It is based on that everybody, wishing to take part in the project, joins the community, where organizers share the information about the upcoming Pump, concealing until the last, what coin will be pumped. Large exchanging platforms don’t resort to these activities. First, they don’t enlist small cryptocurrencies (and it is difficult to pump large ones). Second, they try to restrict similar strategies. However, there are some exceptions. For example, Bittrex and Yobit are one of the largest pump platforms.
Telegram is used as a messenger for Pump & Dump, because of its end-to-end encryption, it enables creating private chats and channels, providing its members’ confidentiality. The largest communities include Pump Notifier (about 27,000 of people), PumpKing Community (about 14,000 people), Crypto4Pumps (about 16,700 people), AltTheWay (abou 8,960 members). The number of group participants can change.
In practice, the Pump looks like this:
- the scheme organizers inform about the certain exchange and the cryptocurrency at the scheduled time. Promoters (scheme participants) immediately start buying the coin out. That is how the first Pump wave emerges. It is preceded by a simple news bit, like an update by the Web site developers.
- the participants of the first wave lure outsider investors-”hamsters”, who push the price higher, and then, they make up the second wave;
- As soon as outsiders enter the market, the group organizers inform through the channel that the coin should be sold.
Telegram channels share the information through each other, as the more people are informed of the next pump, the more successfully it is carried out. Pump groups can be open and private, paid and free. As the organizers buy out the cryptocurrency in advance and inflate its rate, everything depends on the seconds. Paid groups get the information 30 seconds earlier. And by the time the market is entered by free group members (they may not even suspect that there are paid ones), paid group members will have dumped the assets, and the free ones can only hope for another wave.
Pump & Dump scheme is immense. To launch a wave, it is necessary to open hundreds of orders very fast; and so, the strategy has transformed into automated trading. Most work for traders is done by bots, like Moon Bot, HaasOnline and others. There is also special software, auto clickers, which create an image of large trade volume through multiple orders, worth minimum money, being opened very fast. An auto clicker average speed is one click per 1-5 seconds. To start pumping a coin worth $0.001-0.003, one needs 2.5-3 BTC, so even common traders can pump such cryptocurrencies. An example of such coin is Sport that is at the bottom of TOP-1500 list.
Cryptocurrency exchanges don’t like these strategies and pretend to be fighting that. For example, Bittrex restricted the rules for calculating the percent change in cryptocurrency quotes and doubled the minimum trade size. But, in fact, Pump & Dump yields them commission and increases their popularity. And it is not guaranteed that the exchanges themselves don’t take part in the schemes. At least, a daily number of pumps doesn’t reduce; there is even a new modification, ICO pump.
How to save your funds during Pump & Dump:
- don’t invest in already growing trend. The pump yields profits to those, who create it, and to those, who managed to enter it at its first seconds. There is a chance to gain during the second wave, if there is one;
- don’t base your decisions during Pump and Dump on the forums, the exchange chat;
- accept in advance that you can lose your money and see Pump & Dump as a gamble (though it won’t protect your money, but it will save the most important- your nerves and peace of mind).
Conclusion. Pump & Dump should be considered as a separate kind of strategy, where you don’t need technical or fundamental analysis. It is an arguable issue, whether we can we call it a scam, but the one thing is obvious: in general, only the organizers benefit from it. However, why shouldn’t one become a pump organizer? Taking into account confidentiality and no legislation, it is not forbidden. Pumped coin has a steady price, so, if the pump fails, you will lose only on the margin (the coin will hardly fall deeper). So, you need to do little – find as passionate gamblers as you and try. Good luck!
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.