How to protect yourself from Pump and Dump
What is the “Pump and Dump”?
Despite the fact that government regulatory authorities are interested in cryptocurrency exchanges, capitalism prevails at almost every exchange market.
Likely you’ve heard about Elon Musk’s case when his careless tweet about consideration of making his company private has increased in the shares.
Reference: On August 7 Elon Musk posted a tweet about consideration of taking Tesla private at $420 a share. It moved Tesla stock upwards by 11%. Then a scandal occurred after Elon Musk refused to buy the stock. Musk was blamed that he manipulated share prices. That is strictly prohibited at all stock exchanges. U.S. Security and Exchange Commission (SEC) launched investigation. In the result of which Musk was obliged to resign from the position of chairman and to pay $20 millions.
There are cases when traders were presumed responsibilities for receiving inside information. It’s also prohibited. The well-known one is when analysts Goldman Sachs, Evgeniy Plotnik, David Payson, and former advisor Merrill Lynch Stanislav Shpigelman used confidential information to make profit from acquisition of Gillette by Procter&Gamble. All of them were sentenced.
How does “Pump and Dump” work?
Cryptocurrency exchange is not regulated by Security and Exchange Commission completely. And if the exchange is capitalized, traders use Pump and Dump to earn “quick money”. The subject of the scheme is to buy cheap tokens, or altcoins which provokes a huge fuss. So big investors become interested, and soon the price will skyrocket. Then information is spreading through multiple sources — tweets, reddit, forums, social media and paid crypto analytical reviews.
Then ordinary people are starting to buy tokens, or altcoins expecting their growth. Due to resurgence of interest in second-rate coin, the price is growing. More people are starting to purchase it. The price is up 2-5-10 times. This process is called “Pump”. Token value is artificially raised. Thereafter, pump&dump initiatives are focused on selling tokens, or altcoins. There are a lot of bids on the exchange so the price is falling: sometimes to its original price, sometimes lower.
Eventually deal makers have a huge profit within a few hours. And so called “victims” are left with a devalued token. 90% of that its price will never change.
How to avoid risks of pump&dump
Guard yourself against risks of losing money at cryptocurrency exchanges.
- Before investing — look at cryptocurrency inside-out. Read the whitepaper to be sure of the concept of token. Check the github to be sure of intense development. Download cryptocurrency data and pay attention to price fluctuations whether there is no manipulation of the prices.
- Remember that altcoins are mostly manipulated. Because it’s easier to up a coin from 0,00001 to $0,01 than from $1 to $1000.
- Pay attention to trading volume — the less the volume, the easier to manipulate the exchange rate. Maybe you will even see peaks of buying tokens before pumping. Learn more about data types, which help you keep abreast of the situation on the exchange market.
- No rush. If the token is worthwhile its growth will be positive after the pump. Yes, you won’t buy it at the lowest price but the risks will be smaller.
- Don’t lose your head. A cold math is the best strategy. Impulsiveness is guaranteed of losing money within few hours.