Pump and dump on crypto exchanges
Pump and dump is an artificial increase in the price of an asset aimed at a further deliberate collapse of its exchange rate. A pump-and-dump scheme is a form of fraud. It came along even before the crypto market. However, the development of the crypto industry has given it a new lease of life.
Who does pump & dump and why?
Buyers conventionally believe that expensive products are better than their cheaper analogs, and traders are no exception. Investors are primarily attracted to assets with higher prices.
The pump-and-dump scheme is based on this psychological feature. This manipulative strategy is widespread in the crypto market these days.
How does it work? Fraudsters with big money buy out a cheap and little-known coin en masse. An artificial hype surrounds the asset, stirring a buying frenzy. The stronger the demand gets, the higher the price goes. That is called a “pump”.
The pump is always followed by a dump. It occurs when investors who sent the coin into a buying frenzy decide to opt out of the game. They sell the asset at the best price and yield a solid profit. Meanwhile, traders unaware of their scam incur huge losses due to a steep fall in the asset’s exchange rate.
One of the most striking examples of pump and dump in the crypto market is a story that happened to the Squid token in 2021. The coin was named after the wildly popular Netflix drama "Squid Game" but had nothing to do with the show. That created a stir in the crypto market. The coin instantly surged to $2,800 from 1 cent. However, in just several minutes, it again dropped to a few cents.
How to protect yourself from pump and dump?
- Before investing in a token, carefully study all about it: history, general aim, based-on technology, price dynamic, etc.
- Do not fall for an active advertising campaign of a token on social networks (Facebook, Twitter, Instagram) or crypto forums.
- Keep a wary eye on little-known tokens. When they unexpectedly rise in price, that is usually a sign of pump and dump.
