The Notoriety of Pump and Dump: Steps to Protecting Your Crypto Portfolio (Part 2)
In our previous post on this subject matter, we were able to establish a solid ground on how the concept of pump and dump also popularly known as P&D began and how it made its way into the cryptoworld. In this segment, we would further dive into knowing how to identify and avoid them.
What they look like
The tell-tale sign of a crypto pump and dump comes from looking at the charts: do you see a coin with a low price in an illiquid market that suddenly bursts in both price and volume? That’s a pump-and-dump scheme at work by the looks of it.
What’s an example of a pump and dump?
Jimmy hears a rumour that a certain crypto coin is about to go to the moon from a scammer on Twitter or Discord; common hunting grounds for pump and dump groups. He sees that the price has already increased, and due to a fear of missing out on profits he begins frantically buying the coin.
Other investors have already been doing the same, and now the orchestrators of the scam know it’s time to dump their bags. They sell all their coins, which causes the market to crash once they are in the clear. The value of the assets dumps and Jimmy is left with significant losses he can never recover from. Then the organizers of the crypto pump and dump group take its profit and move on to the next coin.
While pump-and-dump schemes are an old, well-trodden ruse in conventional financial markets, the old fashioned ploy has found a new playground to thrive – cryptocurrency exchanges.
Cryptocurrency exchanges aren’t fully regulated for now, so these schemes are in a legal grey area. The Commodity Futures Trading Commission offer rewards for whistleblowers who report pump and dumps, but they’re difficult to track and regulators in many countries haven’t acted yet. That means it’s up to you to educate yourself and make smart decisions if you plan on getting involved with altcoins.
How to avoid p&d schemes
Cryptocurrencies are very appealing to first-time investors — it’s easy to get involved, you could make a huge profit, and there’s constant media hype. It’s fantastic that more people are learning about investing. But this is also a magnet for scammers and fraudsters who profit from misconceptions and misunderstandings. Greed is a powerful driving force. When you’re constantly hearing stories of people getting rich from a modest purchase of ICO tokens, it’s easy to be drawn in. Distinguishing between a price rise motivated by intrinsic value and a pump and dump isn’t easy.
It’s clear you definitely don’t want to get caught in the tail-end of a pump-and-dump scheme. If you’re thinking about investing into a coin that’s really getting hyped on the forums right now, but you’re not so sure, go to the charts and check for yourself. Are there abnormalities with the volume? Was the coin’s market super illiquid just a day ago but is now exploding? If you see this sign, your best bet is to stay away—the dump could start any time, burning your investment in the process.
Carrying out your own due diligence
The acronym DYOR (Do your research) first comes to mind when the preceding actions of a proper investment move come to mind. Questions that must run through your mind are questions such as:
Does this sound too good to be true? Because most times it is.
Does this investment have fundamental value? Is this coin in any way useful? Is it solving a real-world problem?
Who made this coin? Research about the team are their details publicly available, do they have relevant experience, track record and are they trustworthy?
Are they promising guaranteed returns, this is a big red flag as there’s hardly any investment that can guarantee this
Am I under pressure to buy fast or spend more than I can afford?
Do I understand exactly what I’m buying?
What does this coin do what are the use cases?
Is this an emotional or logical decision? Emotion makes us susceptible to scam and emotional hack by criminal emotions must always be in check when making investment decisions.
If the price is rising, is there any real justification for it? Has it happened slowly or suddenly?
Would I be comfortable Hodling it long-term?
Is the Source of the information trustworthy? Where am I getting my information from? Am I basing my decisions on a forum or social media posts, what’s the Track record of the sources? And is there any form of monetary inducement influencing the sources of the info?
From the answers to the questions above and your intuition tells you about the investment, you would be able to make a more informed investment decision, it’s never a good idea to invest based on emotions because that’s what scammers target.