In the cryptocurrency market, pump is a term that refers to the sudden increase in the price of a coin by one or a group of investors. This event often leads to a sharp increase in trading volume and attracts a lot of attention from the community. So what is pump? Let's find out with Coin Review!
Pump and dump concept
1. What is a pump?
Pump is a common term in the cryptocurrency market, referring to the act of “pumping” the price of a coin by buying a large amount in a short period of time. This action creates an increase in demand, leading to a sudden increase in the value of the coin without reflecting its true value. The purpose of pumping is to attract attention and encourage other traders to buy.
Typically, those who execute the pump strategy will sell some or all of the coins they bought at a certain point, causing the coin's price to plummet or return to its original level. The coins often chosen for this strategy are often low-priced and little-known.
Once they have accumulated enough coins, the “whales” or strategic participants will start spreading information to attract inexperienced investors, often by provoking FOMO (fear of missing out) when the coin price is high. When positive news spreads along with predictions from their own “experts”, this creates a strong buying wave in the community and pushes the price to a record high.
2. What is Dump?
Dumping is the act of “dumping” coins onto the market in the crypto space. After a coin has gone through a pump phase and reached a price much higher than its initial price, participants in this strategy start selling to profit from the price difference.
Once the pumpers have made a significant profit and exited, the price of the coin will usually stop rising and trading volume will decrease. Panic will spread throughout the community as the price of the coin continues to fall. Eventually, investors who bought in late will fall victim to this strategy, forced to sell below market price or take “cut losses” to keep the remaining capital.
Thus, it can be seen that pump and dump is a manifestation of "market manipulation" behavior, often carried out by investors holding large amounts of coins, to influence market value according to their will.
Globally, not only in Vietnam, many pump and dump groups have appeared on platforms such as Telegram or Facebook, established by "sharks" to "attract" new people and make profits. Those "attracted" are often new investors in the market, inexperienced and easily caught up in the short-term profit fever.
3. Specific examples of pump and dump
In May 2020, a notable case occurred with the Altcoin Tierion (TNT), a little-known small-cap cryptocurrency. The price of TNT suddenly increased by more than 45%, from $0.05 to a peak of $0.11 on May 12, 2020. However, within 10 days, the price had plummeted to $0.03, lower than the initial price before the price increase.
In particular, when conducting detailed research, there is no specific information about this coin or related project, except for a few positive rumors appearing on Facebook. This is a clear demonstration of the “pump and dump” strategy in the cryptocurrency field, a strategy that can easily fool inexperienced investors and lead to financial losses.
What causes pump phenomenon?
To avoid dump and pump traps, in addition to understanding what a pump is, you also need to pay attention to the causes of the pump phenomenon. Usually, there are 4 main causes as follows:
Liquidity of large investors: The term “shark” usually refers to organizations or individuals who own a large amount of capital in the investment market. This capital is often many times higher than daily transactions, allowing them to easily manipulate the psychology of small investors to create a pump – a wave of buying in the market. In general, the pump phenomenon helps large individuals or organizations increase liquidity quickly and earn huge profits.
Psychological effect – FOMO: FOMO (Fear of Missing Out) is the feeling of fear of missing out, and whales often take advantage of the pump moment to stimulate the psychology of new investors, encouraging them to buy any coin. In this context, new investors may feel pressured by the fear of missing out on profitable opportunities, leading to the decision to trade according to the encouragement of the whales. This psychological effect can cause them to fall into traps and risk losing capital. At the same time, whales can also control trading activities by creating fake reviews and comments on forums or social networks about a certain type of asset.
Unclear legal regulations: The cryptocurrency market still lacks many specific legal policies, creating conditions for sharks to apply pump and dump tricks to attract investors and make easy profits. In contrast, the stock market often has measures to protect investors from fraud and market manipulation. Therefore, when participating in the cryptocurrency market, you should consider carefully before trading because most countries still do not have specific legal regulations in this area.
Initial Coin Offering (ICO): Through ICO, experienced whales often take the opportunity to inflate the price and profit by pumping. After a while, when the asset price has increased to their liking, they can quickly sell it to reduce the price and risk large losses for investors.
How pump and dump works
Typically, the process of pumping and dumping coins usually includes the following 3 basic steps:
Step 1 – Collect and accumulate: Investors will focus on buying a large number of coins when the price is still very low to store. This step not only helps them hold the goods but also creates a "hot" demand for that coin.
Step 2 – Pump and hold the price: In this step, the whales will encourage inexperienced investors to buy the coin at a higher price than the initial price. They often create forums and two-way discussions about the future of that coin and altcoin to manipulate investor psychology, motivating them to buy until the price reaches a certain level.
Step 3 – Dump and exit: At this step, the sharks just need to sell the coins they bought to make a profit.
How to recognize pump action?
Pump and dump in the market is actually a factor that investors can take advantage of to make profits. New investors can rely on some of the following characteristics to recognize this phenomenon:
Sudden Price Increase: If you have been following the market for a while and suddenly see a coin increase in price sharply in a few hours or days, it could be a sign of a pump strategy.
Forum and press information: Pay attention if a reputable news site or forum posts information about a particular coin, especially if its price keeps increasing in a short period of time.
Celebrity Appearances: When a small-cap coin is suddenly mentioned on a celebrity's personal page or becomes a hot topic on tech forums and social media, it could also be part of a pump and dump strategy.
4 ways to escape pump and dump trap and what traders should pay attention to
After learning the details of what a pump is, what investors are interested in is how to avoid pump and dump traps when trading. New and inexperienced investors can apply the following principles to protect themselves from this strategy and avoid unnecessary losses:
Research the project before investing: Do thorough research on the coin you are planning to invest in. This includes learning about the development team, project application, list of strategic partners, and other basic information. This will help you evaluate the potential of the coin and easily detect unusual price fluctuations.
Limit the impact of crowd psychology: In the cryptocurrency market, crowd psychology can inflate prices far beyond their actual value. Remember that there are always many other potential cryptocurrencies to invest in, so it is not necessary to follow the crowd trend to avoid risks.
Effective risk and capital management: Before investing, make a detailed risk management plan and determine the appropriate capital ratio. Volatility is inevitable in the cryptocurrency market, so a detailed plan will help you avoid unnecessary loss of profits when the market fluctuates.
Consider investing in large and reputable coins: Consider investing in coins with large market capitalizations, reliable development teams, and a long history. This can help you significantly reduce your risk and increase your chances of success in the cryptocurrency market.
Conclude
Understanding the concept of pump and its associated strategies is essential for every investor in the cryptocurrency market. This strategy not only poses great risks but also negatively affects the stability of the market. By doing thorough research, managing risks effectively and avoiding getting caught up in the crowd mentality, investors can protect their assets and participate in crypto investments more safely and effectively.
