Understanding pump and dump and how to avoid it

Saturday 16 April 2022

In the trading world, we know there is a term crypto pump and dump, which is an activity carried out to inflate the price of a crypto asset and then blow it up and return to a low price. But this strategy is often misused and wreaks havoc on traders and investors.

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So what is pump and dump?

Although this strategy has been widely misused and has become a scam, it is also necessary to know what it means and how it works so that it can be more easily recognized when it occurs in the market at any time.

As the name implies, pump and dump is a trading strategy that includes pump and dump activities for a crypto asset.

• Pump

Means the activity of buying a crypto asset on a large scale, with the aim of driving an increase in price and demand. When the price has gone up and attracts a lot of buyers, it will be dumped.

• Dump

This means that investors with large capital will resell assets in large quantities and make the price of these crypto assets drop drastically.

How pump and dump crypto works?

Usually, this strategy is carried out by a group of people who play a significant role in the market. Pump and dump activities usually don't take much time, only minutes or even seconds. Thus, it is difficult for small-scale traders to get out if they are caught in the trap of the scam. Pump and dump itself also has a structured way of working, you know.

The reason is that individuals are accustomed to grouping each other and discussing to plan these actions in advance. Those who are known as scammers, start collecting crypto assets when they are still in low volume, aka pump. After enough assets have been collected, they determine the "play date" to carry out the next action, namely dump.

A little or a lot of assets that are hoarded can be seen through the movement of the asset itself. When the price of the asset soars and attracts many other investors to buy it, that's when the scammers will start their action to dump. Gradually the scammers began to resell the asset, which would plunge prices and market conditions into chaos.

How to avoid pump and dump scams

As a trader and investor in crypto assets, of course you don't want your experience in the world of crypto assets to be disrupted by this pump and dump scam. There are 3 things you can do to avoid a pump and dump scam and not get caught in a loss.

1. Don't FOMO

In addition to avoiding pump and dump scams, this method can also help you become more proficient in trading in the crypto asset market, you know. With you not FOMO or Fear Of Missing Out, then you are more responsible in making decisions when trading without having to go along with other traders, and more able to avoid scams including pump and dump.

2. Always Do Research

Related to the previous way, it's also important for you to always do your research, yes. The research carried out must of course be thorough, starting from exploring the origin of the publisher, looking at the offers provided, to reading the white paper of the crypto asset you want to buy.

3. Be Cautious When Initial Coin Offering (ICO)

You need to pay more attention to crypto asset projects that are recently listed or sold on exchanges, which are known as Initial Coin Offerings. The reason is, scammers also often take advantage of this moment to carry out pump and dump actions. Especially during the ICO moments of potential crypto projects but tend to be small in scale.

In just a matter of minutes or even seconds, a trader's assets can immediately disappear if caught in a scam caused by a crypto pump and dump. Therefore we must be really careful when investing in the crypto world.

It would be even better if you first learn about the crypto world and after that do some research on trusted sources. Or you can find the right mentor to invest in cryptocurrency so you don't get caught in a pump and dump scam.

• Lead image from unsplash