Pumps and dumps are a well-known phenomenon in the crypto world, and they can be tempting for traders looking to make quick profits. However, every sudden pump is almost always followed by a dump (retest), leaving inexperienced traders holding the bag if they aren't careful. Hereâs a guide on how to spot these patterns, why they happen, and what to look out for.
What Is a Pump and Dump?
A pump-and-dump scheme involves inflating the price of a cryptocurrency artificially, usually by creating hype or spreading false information. After the price pumps, those behind the scheme sell off their holdings at the inflated price, causing the coin's value to plummet, or âdump.â Traders who bought in during the pump often see their investments rapidly lose value.
Signs of a Pump and Dump
1. Sudden, Unexplained Price Increases: If you notice a coin's price shooting up for no clear reason, it could be part of a pump. Look for rapid gains within short time framesâlike a coin jumping 30%, 50%, or even 100% in a matter of minutes or hours.
2. Low-Volume Coins: Smaller, less-known coins with low liquidity are prime targets for pump-and-dump schemes. These coins can be easily manipulated because it doesnât take a lot of buying pressure to push the price up quickly.
3. Hype on Social Media or Telegram Groups: Be wary of coins being promoted heavily on Twitter, Reddit, or private Telegram groups without any substantial news or updates. Often, scammers use these platforms to coordinate and manipulate prices. If it sounds too good to be true, it probably is.
4. Massive Buy Orders or Large Spikes in Volume: If a coin suddenly sees a huge increase in buy orders or trading volume thatâs not backed by any significant news, it could indicate an incoming pump.
The Dump: What Comes After the Pump?
Every pump is followed by a dump, and this is where things get tricky for retail investors. When the price reaches a peak and those involved in the pump start selling, the price begins to fall just as quickly as it rose. This dump is a retest phase where the inflated price corrects itself, often falling below its original value.
How to Avoid Falling for a Pump and Dump
1. Do Your Research: Before jumping into any trade, make sure you understand the fundamentals of the coin. Is there any real development behind the project, or is it just a random coin getting hyped? If thereâs no legitimate news or partnership, stay away.
2. Look for Genuine Volume and News: If a coin is surging but thereâs no solid news backing the price move, itâs a red flag. Real, sustained price increases are often supported by positive news or developments.
3. Set Your Limits: If you do enter a trade that feels like a pump, make sure to set stop-loss orders. That way, if the price starts to dump, youâll limit your losses and wonât be stuck holding an asset thatâs rapidly losing value.
4. Stay Away from Low-Liquidity Coins: Larger, more established coins are less likely to be the target of pump-and-dump schemes. While Bitcoin or Ethereum may experience volatility, they are much less susceptible to the wild swings of smaller coins.
5. Pay Attention to Exchange Listings: Some pumps are driven by listing announcements on major exchanges like Binance. If the coin is being listed on a reputable exchange, it could lead to a real increase in price. However, if it's a random token being listed on a lesser-known exchange, be cautious.
Understanding the Retest
In technical analysis, after a sharp price rise, a retest is common. This retest is when the price of the asset returns to a previous support level to see if it holds. In a genuine price surge, this can be a healthy correction before another move upwards. But in a pump-and-dump, the retest often signals the beginning of the end for that particular price movement, as traders sell off their coins, leading to further declines.
Conclusion
In the wild west of crypto, itâs crucial to stay vigilant and avoid falling for pump-and-dump schemes. While it may be tempting to jump in when a coin starts to skyrocket, remember that what goes up fast often comes down even faster. Protect yourself by sticking to solid projects, doing your own research, and watching out for the warning signs of artificial price inflation. Always be cautious of sudden price surges with no solid fundamentals behind them, and never invest more than you can afford to lose.
By understanding how pumps and dumps work, you can avoid getting burned and make smarter, more informed trading decisions.
