Cryptocurrency Pump and Dumps are a phenomenon that has gotten a lot of attention in the world of cryptocurrency and investing. They are market manipulations in which assets (usually cryptocurrencies) are artificially inflated in price (pump) and then quickly sold (dump), defrauding unsuspecting investors. In this article, we’ll look at how cryptocurrency pumps and dumps work and what risks they carry.
What are Cryptocurrency Pumps and Dumps?
Pumps and dumps are a form of market manipulation in which a certain active, in this case cryptocurrency, is subjected to coordinated action by a group or individual in order to artificially increase its value. These manipulations can include giving out false or manipulated news, aggressive advertising on social media and forums, and the use of large amounts of funds to increase the price.
When the price of the asset reaches the desired level, the organizers start selling the asset, earning a profit in the process. This leads to a sharp drop in price, forcing investors who were attracted to the pamp-phase to sell their assets at a loss.
Cryptocurrency Pumps and Dumps Process:
Asset selection: Organizers choose a specific cryptocurrency to manipulate. They may choose illiquid and cheap assets that are more susceptible to manipulation.
Pump phase: Organizers start to actively promote the asset through various means. They create an illusion of high demand and price growth.
Investor Attraction: Investors, seeing the price rise, start investing in the asset, expecting a profit.
Dump phase: After reaching the target price level, the organizers start selling the asset, causing panic among investors and a sharp decline in price.
Investor Losses: Investors who invested in the asset during the dump phase lose money as the price collapses.
Risks of Cryptocurrency Pumps and Dumps:
Loss of Funds: One of the major risks for investors is loss of funds. Those who invested in an asset in the dump phase often lose large sums of money as the price collapses in the dump phase.
Legal implications: Organizers of pumps and dumps can be subject to legal liability. Regulators in various countries are seeking to combat manipulation of the cryptocurrency market.
Reputational risks: Investors caught up in manipulation may lose confidence in the cryptocurrency market and financial markets in general.
How to Protect Yourself from Cryptocurrency Pumps and Dumps:
Research the asset: Do a thorough research on the asset before investing. Make sure it has a viable application and development team.
Beware of Promises of Quick Profits: If something seems too good to be true, it probably is. Beware of promises of guaranteed profits.
Use stop-loss orders: These orders will help you minimize your losses if the price drops sharply.
Watch out for regulatory controls: Learn about the regulatory measures in your country and follow them.
Cryptocurrency pumps and dumps pose serious risks to investors and can be compared to gambling. However, through caution, education and proper research, investors can protect themselves from participating in such manipulations and reduce their risks in the cryptocurrency market.