Exchange education: Pump and Dump

Although the cryptocurrency industry is maturing and taking the necessary steps to integrate with the traditional banking and financial system, it is still in the “Wild West” phase. Due to the lack of regulation and consumer protection in the cryptocurrency markets, there is still ample opportunity for fraudulent and manipulative schemes such as pump and dump.

Pump&Dump is a classic example of market manipulation.  It is an exchange scheme in which the price of a worthless asset is artificially inflated through well-planned marketing. 

With the development of the Internet, it has become most effective for two reasons: technical and psychological. Technically, the Internet allows for powerful information preparation in a short time. Psychologically, it triggers the syndrome of lost profits (FOMO) in the mind. Several years ago, many did not consider the potential of Bitcoin and are now afraid of missing out on the new “star” of the crypto market.

Pump and Dump is a trading strategy based on the rapid growth of cheap assets, usually a stock of coins with a low market capitalization. The scheme is promoted at two main stages - pump, “pumping,” a sharp rise in the value of the cryptocurrency and dump, “drain,” a price collapse.

Group scheme technology.

The Pump can be initiated by one trader (the so-called Keith) or a whole group. Pumping up the selected currency with the help of a group is much cheaper and more profitable. There are quite a few such groups running today on semi-anonymous messaging services such as Discord and Telegram. For example, PumpKing Community, one of the largest groups, has more than 17,000 subscribers. Other similar Telegram groups include Pump.im, Crypto4Pumps, We Pump and AltTheWay. 

As a rule, the organizer gathers collective pumpers into a group and coordinates the main four stages of the planned scheme. 

In such groups, all processes are surprisingly well organized. Team leaders send out specific instructions, including the exact pump time (taking into account time zones), what the “target” pump price is, and how the pump signal will be given. Some groups use images instead of text as a signal to fight bots.

At the first stage, the organizer informs the selected coin, time and crypto exchange where trading will begin. From this moment, all members of the group (insiders) begin to buy currency at a still low price, try to avoid price increases and accumulate a large number of tokens. Depending on the type of pump, the accumulation of assets can last from a couple of minutes to several months.

The second stage is the active phase of advertising and pumping up prices due to hype and attracting outsiders.. The promotion of the coin on social networks begins to create a buzz around it. Such pumper groups are advertised on popular Facebook, Instagram and Twitter. False, misleading statements, large numbers of social media posts, fake news, advice from “experts” on trollbox chats, posts about the coin on forums, and similar tactics are used to convince potential buyers that a worthless asset is actually a hot buy that should not be missed.

By setting up large buy/sell walls or bots, the desired rate is adjusted. Walls are orders with an inflated price and huge volumes that can stop the rise or fall of the exchange rate. This attracts new outsiders and leads to a parabolic rise in the price of the coin. At the peak of the pump, the number of buyers can increase by 90%, and the price increase up to 100% for small tokens and up to 40% for coins with large capitalizations. Outsiders outside the group, seeing the rapidly rising price and trying not to miss out on the benefits, buy the coin at the peak of its price or hai (high-high price). Such inexperienced traders are called hamsters. 

And the next stage, the third - cutting the hamsters. The dumping part is the stage of complete sale of tokens. Once the coin reaches a given “target” price, insiders are instructed to “flip” the coin to make a profit. At the same time, advertising and hype continue to drain the currency as expensive as possible. 

This leads to an avalanche-like drop in the artificially inflated rate and the fourth stage, the so-called dump, where insiders merge their assets at a favorable price (“cut the hamsters”), and outsiders are left with a package of assets of tokens unclaimed on the market, purchased at an illiquid price. 

Any pump ends with a large-scale drain of assets. Only experienced traders can predict the drain and get rid of purchased assets in a timely manner. 

One of the examples of the operation of the entire short pump scheme in the Big Pump Signal group, held on January 13.

On this day, it was announced that the Russian altcoin GVT, from the Genesis Vision company, was chosen as the token, and trading would be on the Binance crypto exchange. Before the signal to start the pump, the coin was trading at approximately $29.22.. The price began to creep up almost immediately after the signal about the start of the pump and four minutes and 16 seconds later it was already $35.05, and 9 minutes and 16 seconds after the signal it reached its peak of $45.41, i.e. 55.51% profit from the original price. In other words, if a participant invested the equivalent of $1,000 immediately after the signal was given and managed to sell at the peak, his investment grew to $1,555.10 (minus the 0.1 percent trading fee charged by Binance).

Whale Technology

In addition to these methods of promoting a coin, there is alsodirect pumpingas carried out by one large investor capable of carrying out all stages independently. 

The whale (a large trader, a professional and experienced market participant) begins to buy large volumes of one of the low trading coins, placing a huge buying wall. Such an operation requires large financial influences, sometimes even six figures.  Since there is not enough liquidity (i.e. there are not enough people willing to sell the coin at that price), the whale begins to push the price up the wall. Other traders soon become aware of the "trending" coin as it has a daily price increase.

This price increase attracts retail traders who want short-term profits and many newbies (hamsters). Thus, the demand that was fake slowly turns into reality as more and more people want to buy the coin.

When the price is high enough, the whale begins to sell a large number of the coins it bought previously. This results in big profits for the whale and leaves small investors with nothing. These investors are known as "packholders" because they hold on to the cryptocurrency in hopes that the price will rebound.

Smaller lone pumpers, called "bears," operate in a similar pattern. But their investments are much more modest, so they often work in small coordinated groups.

They independently purchase the selected token, promote it and drain assets to outsiders. 

Pump&Dump schemes are considered securities fraud by the SEC in most regulated markets, but the legal status of Pump&Dump in the cryptocurrency market is not regulated in most countries.. Therefore, despite the fact that this scheme is unethical, it is not officially illegal.

Today the situation with Pump&Dump in the cryptocurrency market already looks critical. Cryptocurrency exchanges began to independently resist the scheme. Thus, Bittrex, back in November 2017, warned about blocking accounts participating in pump and dump schemes.

Participating in a pump or ignoring it is everyone’s personal choice. The main thing is to protect investments.

How to avoid becoming a victim of pumpers?

You can track pumps and dumps of cryptocurrencies on exchanges on paid platforms (for example, CoinData). They will help you find out whether a sharp rise in the currency rate is natural or artificial.

Among the main signs of manipulation, traders note:

• a sharp and unfounded increase in interest in an unpopular currency (advertising on social networks, suspicious spam mailings, advice from “experts” in chat rooms); 

• multiple growth in trading volume on crypto-platforms;

• inflated orders in orders for low-liquidity tokens, which may be evidence of artificially created buy and sell walls;

• appearance in chats on exchanges, an abundance of information about a specific coin precisely during the formation of buy walls - using pumps to attract attention to the promoted coin.

If you nevertheless become the “owner” package”, do not rush to sell at a disadvantageous price. Wait for the next pump and drop the package.

Read also: Bulls, bears, hamsters and other exchange fauna