With many cryptocurrency projects coming onboard, cases of pump and dumps are increasing. The best way to avoid the trap of a pump and dump situation is to understand crypto dynamics.
What is pump and dump?
A pump and dump occurs when certain individuals or organizations manipulate the price of cryptocurrency. In other words, the price of a cryptocurrency is not determined by market forces of demand and supply. The end result is that an asset which is valued lowly assumes a very high price, attracting many people to invest in it.
Since the price of the coin is not influenced by essential fundamentals, it will shoot down once the pump and dump period comes to an end.
How does the pump and dump process occur?
The pump and dump process starts when a certain entity or individual buys a coin in very large quantities, thereby artificially increasing its price. In response, as the price of the coin increases, more investors buy it. This further fuels the price rise.
In order to push the price of the token more, the entity responsible for pumping and dumping promotes it aggressively. It posts ads all over social media platforms such as Twitter, Instagram, Facebook and many more. As a consequence, many people are cheated into buying such a coin.
When the price has reached their target, the individuals or entities sell the entire quantity of the coin they have. In such a way, they get large gains. Sadly, after the entity sells the cryptocurrency, its price nose-dives, leading many people to experience huge losses.
How to identify a potential pump and dump scheme?
Despite it being very difficult to tell with certainty that a cryptocurrency is undergoing a pump and dump process, there are various signs to observe.
Inaccurate information: Usually, an entity managing a case of pump and dump is involved in a hype. There is too much selling, in a pushing way. It advertises on all possible platforms. Therefore, when a coin’s price suddenly rises without any associated fundamentals, it is most likely to be a case of pump and dump.
In order to avoid a case of crypto pump and dump, one should carry out a thorough research. For example, you need to identify the fundamentals responsible for the sudden price increase. If you cannot find any underlying causes of the sudden price change, better stop buying that coin.
It is also important to find out the team behind the project. A well performing cryptocurrency has experienced and knowledgeable team members, with traceable records. Apart from this, an individual should follow the project’s social media platforms and website.
Analyse the trading volume: The trading volume indicates whether the up trending of a token is genuine. If there is a steady growth in the trading volume of a cryptocurrency over a long period of time, then one should consider buying it. However, if there is a sudden rise in the trading volume without a backing reason, then better avoid investing in such a cryptocurrency.
Conclusion
Pump and dumps usually take place involving cryptocurrencies which have low trading volumes and market capitalization. Therefore, it is best to invest in cryptocurrencies which are highly liquid and shun advice or influence from social media.
