Cryptocurrency Pump and Dump schemes: how does it work and is it possible to make money on it?
Crypto Pumps is one of the hottest topics related to the cryptocurrency market. Finding cryptocurrency public accounts on a social network, forum or channel on Telegram, where there would be no suggestions to “raise 300% on the coin X pump” and hot debates between the “diapers” and their opponents would not go on, is almost impossible. However, what does Pump and Dump mean when applied to the crypto market, and whether it is really possible to make good money on these schemes, we will understand.
What it is?
Pump and dump - This is one of the classic schemes of fraud on exchanges, which appeared long before the very idea of cryptocurrencies arose. It consists in the fact that the owner of the asset artificially raises its value in order to sell it as dearly as possible. After the initiator of the scheme “dumps” its share, the value of the asset falls off and investors lose their money.
In the traditional stock market, Pump and Dump usually use the so-called “junk” stocks - cheap securities of small companies with low market capitalization. Such assets can be bought cheaply, and for a sharp increase in value, it is enough to attract a relatively small number of investors. To create increased demand, fake positive news, false financial statements and “insider information plums” about the imminent increase in the price of shares of a company are used.
A natural reaction to the activity of fraudsters was the increased regulation of the market for "garbage" shares, which began with the beginning of the two thousandth. Many organizers of the pumps received very real prison sentences. Even more, however, were able to avoid punishment or pay off a small fraction of the profits.
However, the cryptocurrency market is practically unregulated, which frees up the hands of scammers. Moreover, now there are more than a thousand little-known coins with low capitalization (junk), and the development of social networks and instant messengers has greatly simplified the attraction of investors. In this regard, the Pump and Dump scheme is extremely popular in the cryptocurrency market.
How does Pump and Dump work in the crypto world?
There are no fundamental differences from a similar scheme in the stock market.
After choosing the exchange and coin that will be used for the scam, the organizers first buy tokens for a penny (in small portions so as not to provoke a rate increase ahead of time). Then begins the “pump” - work on raising the course. In the exchange’s chat, social networks and messengers, information is disseminated about the inevitable imminent growth of the rate of this coin (or it is directly stated that it is remembered, but more on that below), on the exchange itself, the bots of the pump organizers place and collect many large orders for its purchase, by essentially, transferring money from one pocket to another.
Then, a lot of investors, attracted by the prospect of easy money, start buying up the currency, and its rate rises even higher. Pamp organizers sell accumulated token stocks at an inflated price (dump) - the rate is collapsing. “Pampers” consider profit, investors receive losses and coins that nobody needs.
Pump organizers, as a rule, use little-known currencies with low capitalization - the so-called pump-coins (a less delicate name - shit-coin).
For example, TrustPlus is a typical pump-coin. And in the chart below you can see a typical Pump and Dump on the example of this coin. In just a day, the course managed to triple and fall almost to the initial level. Capitalization over the same day increased from 3 million dollars to 8.5, and then fell to 4 million. So the speculators have earned their pair of millions.
However, due to the relatively small total volume of the cryptocurrency market, pamps also occur with fairly large currencies. For example, the pump-coin has recently been often called TRON, the rate of which in January 2018 managed to grow three times in a day and fall back.
But only large market players can crank such scams with currencies with a capitalization of billions of dollars (at the beginning of the pump), unlike shit-coins with a capitalization of a couple of millions.
Most large cryptocurrency exchanges for pumps are not suitable. This is partly due to attempts by a number of sites to limit the activities of scammers, but mainly with a limited list of cryptocurrencies traded on large exchanges, which usually includes only “top” tokens. And the organizers of the pamp are interested in platforms that support a large number of small coins.
On a global scale, Bittrex is considered the largest pump site. It is among the top ten cryptoexchanges in terms of trading volume (over the past month - from 0.5 to 1.8 billion dollars per day) and supports more than two hundred tokens. The TrustPlus pump, which is shown on the chart above, happened on Bittrex.
But Bittrex is still the domain of relatively large players. The true embodiment of the “exchange for the pump” is the well-known in the CIS platform Yobit (see the overview of this exchange here). It is located at the end of the first fifty exchanges in terms of trading volume and has a disgusting reputation due to problems with deposits that are periodically “lost” when withdrawing money and reports about the administration’s involvement in a number of scams. Nevertheless, in the Russian-language segment of the Internet, this exchange is still in some demand.
Many cryptocurrencies are traded here, and their number is constantly increasing (at the moment - more than 600). Many tokens traded on Yobit can not be found anywhere else (including because coins with a capitalization of several thousand dollars are not really needed by anyone). Especially “tasty” for the organizers of the pumps, Yobit makes it possible for a modest amount (no more than 0.5 BTC) to bring your cryptocurrency to the exchange.
To date, the main way to recruit investors for the cryptocurrency pump is through channels in the popular Telegram messenger. Moreover, there are relatively few channels using the “old-fashioned” scheme with the injection of “insider” information about the imminent growth of a coin.
The creators of most pump channels collect subscribers by expressly stating that they will be engaged in pump tokens. However, they assure that subscribers will know about the pumps in advance and will be able to earn money, unlike other market participants. Of course, they turn out to be the main source of money for the organizers, who openly call the process “cutting hamsters”.
There are also paid pump channels on which “hamsters” also pay to be “sheared”.
In addition, channel owners also seek to retain subscribers. To do this, after the dump, posts are published from those who managed to earn money together with the organizers (with the message “you will be lucky next time”). Sometimes they add something like “don't worry, the coin is promising, it will rise in a couple of months”.
So Ostap Bender himself would be delighted with the scheme of operation of the pump channels - people pay money to take even more money from them, and then ask for more.
Attempts to Combat Pump and Dump Cryptocurrencies
The lack of regulation of the cryptocurrency market practically guarantees that the organizers of the pumps will not suffer any significant punishment. At least in the near future. However, the prevalence of such schemes adversely affects the cryptocurrency market as a whole and undermines confidence in digital currencies. In this regard, many exchanges are trying to deal with speculators, moreover, they “beat” them first of all according to their “investment base” - for example, Bittrex warns that the exchange will block the accounts of pump participants.
However, so far these measures have not achieved a significant result. However, existing trends towards increased regulation of the cryptocurrency market suggest that the “window of opportunity” for Pump and Dump will gradually narrow.
Tips for Traders
The main problem of attempts to make money at Pump and Dump for those who are not its organizers is that, even having recognized the pump in time, it is almost impossible to predict the exact timing of the beginning of the dump.
Pump recognition skills are useful not only for trying to make money on it, but also for those who want to reduce their risks and not "buy" the sudden growth of a coin.
The main signs of a pump:
- A sharp surge in exchange activity (primarily the abundance of large buy and sell orders) and the growth of the cryptocurrency rate in the absence of positive news;
- The lack of similar growth on other exchanges where this cryptocurrency is traded;
- Active calls to buy this cryptocurrency in the chat of the exchange, on forums, Telegram channels and on social networks.
Earnings on the pumps
It is useless to try to make money on the “short” pump - it is impossible to manage to react to it without being among the organizers.
Earnings on the “long” pump are theoretically possible - from traders who manage to buy currency during the pump (point 1 on the TrustPlus chart below) and sell it as quickly as possible, there is a chance to make a profit (on average about 30-40%). However, there are actually minutes to place an order.
And you need to be prepared for losses, the probability of which is approximately equal to the probability of a successful transaction. At the same time, being late with the sale of a coin, it should be sold as quickly as possible, fixing some loss, otherwise the losses can be much larger.
However, the pump has one feature that is relatively predictable - after the first collapse, new short-term growth often occurs when “hamsters” are included in the trade - it is clearly visible by the second, smaller peak on the chart. Due to this, by selling the currency at point 2 (even with some loss), you can buy it at a minimum (point 3) and “try again” by selling it at point 4. But you cannot buy a coin during the second rise after the pump in any case, losses are guaranteed.
You must also understand that the "secondary peaks" are not typical for very small shit-coins with a capitalization of less than a million dollars. So you shouldn’t get involved with the pumps on Yobit - the risk is high, and the potential profit is negligible due to the small trading volume.
Does it make sense to subscribe to pump channels on Telegram?
From large pump channels like Pump Notifier / Trading Signals (almost 30 thousand participants) you can get useful information about pumps. The scams organized by the organizers of such channels usually occur on large exchanges (the same Bittrex), with a rather large volume and last at least several hours. So an attempt to take risks and earn extra money can make sense.
Channels with an audience of several thousand people (and any channels working with the Yobit exchange) are created purely for the "divorce" of subscribers and contacting them is more expensive.
The cryptocurrency market repeats the history of the classic stock market - the same laws, the same frauds (albeit with the addition of new nuances). Attempts to earn money in the Pump and Dump schemes in the crypto world are risky and in many ways akin to playing in a casino - in the end, its organizers still win. So you can only “connect to pumps” if you have free funds that you are ready to easily part with.