People who think they have missed the boat to become a millionaire with Bitcoin are desperate to spot a new successful coin at an early stage. This new market of desperate sellers has attracted a lot of scamming sellers. There are an insane number of pump and dump schemes in the cryptocurrency market today.
And these are one of the leading reasons why a retail investor is not forthcoming about putting their money in the not only volatile but unsafe cryptocurrency market. So, what are these pump and dump schemes? And how can an investor sense them and stay away from them?
What is a Pump & Dump?
The name is pretty self-explanatory. The system works in two phases. First is the pump phase, when the value goes up. The second is the dump phase when everyone is just trying to get out and salvage whatever money they can.
The Period of Pump
A new cryptocurrency enters the market. Now, the idea is to create a lot of buzz about this new currency in the market. All the cryptocurrencies derive their value from the technology underlining them and speculation. But, there are not a lot of people who have enough knowledge to delve into the technology side of things.
All these investors rely on the news the currency has been creating and just put their money in it. The developers behind the project make sure that the currency creates enough news for retail investors to buy.
During a period of pump, the promoter will keep buying some coins discreetly. This will jack up the price of the coin. This price hike will also sit well with all the positive stories that are planted across different discussion boards and blogs. All this carefully crafted web of lies comes together to convince an unassuming investor to believe the story and make an investment.
As people buy, the prices go further up, making more people believe in the positive outlook towards the coin. Of course, no one wants to miss out on a crypto coin which is creating a lot of positive buzz. The wheels are now in motion.
The Period of Dump
Now, the key to this elaborate plan is that the promoter should have enough coins to make a profit out of the scheme. They keep studying the price chart to ascertain the point at which they know the bubble will not be able to sustain itself. As soon as the currency hits a peak, they cash out.
With so much selling, a panic sets in the market. So, all the investors try to get rid of the investment for whatever price they can. Of course, the currency crashes. The scheme is complete, the administrators have earned a lot of money for themselves and the currency has gone bust. And, that is what a pump and dump is.
How Can You Spot It?
Many people knowingly invest in pump and dump schemes too, because they have done their own analysis too. They buy the cryptocurrency for pennies and get out just before the promoters dump their share in the market. It is a risky game though.
Sometimes these dumps can take hours together, but at others, these dumps can happen in a matter of seconds. Almost 90% of the people who invest in these schemes are likely to lose their money. For a retail investor who is just getting started in the market should not invest in these schemes.
So, how can you recognize such schemes and avoid them completely? Here are the hints that will give away any pump and dump schemes.
If there is a new cryptocurrency and you are seeing a lot of blog posts about it or discussion threads about them, then you know that there is something fishy. These postings will feel more like promotions. They will talk about how great the currency is and how much money you can make investing into it.
There will always be a sales push and not a lot of technical discussion about it. These are all marketing tactics to make people think that there is a very valuable opportunity at hand and that this window of opportunity is going to close pretty soon. This is to create a sense of urgency among the prospective investors.
The fear of losing out is strong in the cryptocurrency market and no one wants to miss the next Bitcoin. These promotions take advantage of that fear and nudge the investors to put their money in this next great opportunity.
No Discussion of the Basics
Every cryptocurrency comes with a white paper that explains the technology powering the cryptocurrency and how the founders wish to apply that technology to solve future problems. But, in a pump and dump scheme the plan is not long-term. The promoters just want to make you invest in the coin, so that they can make the money.
So, a vision will be missing in these cryptocurrencies.
- Why have they been created?
- What problem do they intend to solve?
- How will the business scale?
And more such questions are not answered by a pump and dump currency.
Founders Holding a Disproportional Amount
This is a very strong sign that the currency that you are considering is nothing more than a pump and dump scheme. In the case of a legit cryptocurrency, the founders want the people to use the cryptocurrency more so that the platform becomes more popular.
But, the developers behind a pump and dump currency are in the business only to make money. So, they want most of the currency to themselves. In fact, when the dump phase is about to begin, the people behind it will try to accumulate as much currency as possible. So, even if you are already in a pump and dump scheme before, you can still save money by keeping a track of the founder’s movements.
If you can see that either the founder has a huge chunk of the cryptocurrency or are accumulating it, then start selling. This is a great time to get out because you are about to reach the peak price. From there, everything will just spiral down.
No Existing Clients
A cryptocurrency is used to power a technology platform. For instance, all the transactions on the Ethereum platform happen via Ether.
So, if you do not know of any known applications of the cryptocurrency other than just an investment opportunity, then you are most probably looking at a pump and dump scheme. Are there any clients of the currency platform that you know? If not, then the cryptocurrency developers are only in for the money – your money.
This might seem obvious, but people don’t think critically before making many decisions. Investing in a pump and dump scheme is one of them. When you are thinking of investing in any cryptocurrency, only ask yourself – If this was a full-fledged business, would you invest in it? If your answer is No, then you should probably not invest.
Because your logical mind is telling you that you are investing in something with zero fundamentals, with no preparation for the future and in something owned by shady promoters. This is a recipe for disaster. So, don’t be a guest to this party.
The cryptocurrency market is surely exploding right now. People who made investments in the past cannot hide their smiles. It is understandable that it can make a naïve investor to take hasty decisions. But, stay away from this common trap. Whenever an investment opportunity is on the front page news, it means that the time to buy has past and it is time to sell.
Wait for the markets to subside, and the currency prices to go down. As the prices will become lower, the incentive for such scammers becomes less and less. This means that there will be fewer pump and dump schemes. It is then a good time to invest in this market again.
There are so many altcoins that have proven their worth in the market, including Monero, XRP by Ripple, Sia, and more that can fetch you really good returns. So, instead of wasting hundreds of dollars on coins with fuzzy fundamentals, invest in a few solid coins and watch your money grow. It might grow slowly, but it will at least, not vanish.