Some say ‘pump and dumps’ are the way to get rich quick. Don’t fall for the trick and the lure of ‘easy money’. In this article we’ll explain what ‘Pump & Dumps” are in the cryptocurrency mark, how they work and why they are a scam.
What Is A Pump And Dump?
A ‘Pump and Dump’ is a form of cryptocurrency market manipulation. A group of people band together with the goal of artificially increasing the price of a cryptocurrency quickly (the pump), then sell the coin en masse to naive speculators (the dump). The guys that bought low and sold high, make a profit, whereas the stragglers buying near the top lose money during ‘the dump’.
These ‘Pump and Dump’ groups usually organise on chat apps like Telegram and the organisers will choose a coin and set a time for their group pump.
In the regulated stock market, this kind of activity is illegal. However, as the cryptocurrency space is lacking regulation, these sorts of schemes are able to prosper and have become quite common.
The Inner Workings Of Pump & Dump Groups
Each Pump and Dump group will have an inner circle of organisers. These guys are in charge of:
- Recruiting new members to the group.
- Choosing a coin to manipulate.
- Selecting a small exchange for the action to happen.
- Coordinating the ‘Pump and Dump’ and giving instructions to the group.
There Are Two Types Of People In The Scheme
For every Pump and Dump group, there are just two types of people.
- Victims (who are very likely to lose money).
Organisers make the decisions and are always successful in profiting from these schemes. These people have plenty of time to buy the coin they are choosing to pump, but at a rock bottom price. They hold all the cards and make all the decisions.
The paid inner circle usually have a good chance of ‘Pump and Dump’ success. However, even a simple disconnect in internet connection when the information is being distributed can be enough to miss the boat. The paid inner circle usually do not have much time to react to the decisions of the organisers.
The inner circle get the information next. However, the graphs on exchanges are likely to show that the price of the cryptocurrency is pumping. This means observant members of the outer circles may get the information quicker and be able to buy the coin at a lower price.
The people in the final circle are the last to know about the pump and naturally have the least chance of making money from the scheme. Indeed, it’s been estimated that only 15% to 10% of outer rim and final circle participants (the majority of the group) are able to realise a profit. That’s right, 85% to 90% of them will lose money!
Stage 1: Operation Marketing
The first step is to get the word out there. The Pump will be announced in the group chat. Luckily for these budding pumpers, the organisers are usually thoughtful and create a geo targeted countdown timer. This means that all group members can be sure when the action is going to happen, regardless of their time zone.
The exchange where the pump is to happen will also be announced. The types of cryptocurrencies that ‘Pump and Dump’ groups usually target are not listed on respectable exchanges like Binance. This means that most activity happens on smaller exchanges like Cryptopia. It’s for this very reason that TotalCrypto refuse to create content on these types of exchanges.
When the pump is announced, the coin will not be made public knowledge until the last moment. The cryptocurrency exchange where it is taking place is only announced at this stage so people have time to make an account and transfer funds.
Stage 2: The Clock Begins To Tick
Once the countdown is activated, group members set about creating accounts on the chosen exchange and transferring funds to it.
With a ‘Pump and Dump’, time really is money. A few seconds delay from the announcement and buying the coin might be the difference between being a winner or loser. Group members usually use this time to make sure their internet connection is solid and shut down any programs that may reduce their computers speed.
The chaps that take pumping and dumping super seriously, don’t actually place orders themselves. Instead, they use computer scripts to buy and sell the coin (therefore saving a few crucial seconds). In case you still think that taking part in these schemes is a good idea, just be aware that you need to have reflexes faster than a bot.
The Final Countdown: The Pump Begins
The organisers will finally name the coin they want to pump. Sometimes these will be announced in three different lines. Why you might ask? It’s so that people cannot copy and paste the the coin’s shorthand into their bot. Talk about Pump and Dump organisations playing ‘fair’.
Most coin reveals also list a ‘target’ – just so you know when you are pumping too hard. It is perhaps no wonder that pumps almost never reach their target. Would you really buy the coin when the target is in sight?
Let The Dump Commence
By now the pump will be visible on the exchange and Coinmarketcap.com, the coin is likely to be in the top few gainers for the day. Naive investors may see the price spike and assume that massive news must have been released by the coin. Fear of missing out drives these people to buy the coin at an artificially high price. These unwilling participants are the ones to take the greatest losses.
Once the sell off begins en masse, panic sets in and all scheme participants try and exit as quickly as possible. The price of the coin then plummets to the ground.
In Practise What Is Happening?
Quite simply the organisers are buying coins cheaply and selling them to outer ring members of their groups for hugely inflated prices. Joining Pump groups is usually free, but this is the true cost of taking part.
To make it even more unsavoury, the group organisers congratulate their groups after the dump has occurred like a fox congratulating a chicken on being so delicious.
How Big Can Pumps Get?
The largest pump of all time was E-Coin on the 6th February 2018. At the start of play on the 6th E-coin was trading at just $6.06 per coin, had a 24 hour trading volume of $1,269 and a market cap of $30.1 million.
In the space of a day, a pump and dump group managed to to artificial manipulate the price of E-Coin to:
- $1.44 billion market cap.
- $289.34 per coin.
- Just $40,000 trade volume was needed to get the coin to a $1.4bn market cap.
- E-Coin broke the top 20 on Coinmarketcap.
How Did A Pump Like E-Coin Happen?
Pump and dump groups take advantage of how cryptocurrency market caps are calculated. The formula is simply:
Price (that the coin was last traded) * coin supply = market cap
Cryptocurrencies with high trade volumes make terrible choices for pump and dumps. The reason is that it simply takes too much money to move the price.
The example above shows the Bitcoin/USD market. You can see that to move the price of Bitcoin up by $1, you would need to spend $244k on Bitcoin. This is why these groups target coins with very low trade volume; it’s easier to move the price with a limited amount of money. Just before E-Coin’s pump, only $1.2k of trade volume was recorded. This means that even $1,000 thrown at E-coin would move the price whereas the same cannot be said for larger cryptocurrencies.
As group members purchase a coin at an ever increasing price, this drives the market cap to ever higher levels. The sad truth about E-Coin is that there were probably a lot of people buying E-Coin at the top, after seeing it rise to the top 20 on Coinmarketcap and thinking it must be the next big thing. After all, how bad can a coin be if it’s got a market cap of $1.4bn?
The sad fact is that the market cap of small cryptocurrencies can be manipulated relatively easily. Pump and Dump groups prey on the emotions of cryptocurrency investors. No one wants to miss out on the next big thing, big pumps artificially create this fear of missing out and we are sure this is why many people bought E-Coin on the 6th Feb.
Other Strategies Bad Actors Use To Pump Or Dump Cryptocurrencies
The serious pumpers go to extreme lengths to create hype for their chosen coin. Sometimes they will use social media, forums, YouTube and blogs to spread fake news about the coin to be pumped. This includes the use of fake screenshots about developments, partnerships or exchange listings. This deception may even start weeks before the pump. The idea is to create a market of buyers for the coin once it pumps up sharply. These victims will naturally assume that the fake news is real and that the coin is going to the moon.
Pump and Dump group organisers can be smart. It is very important that you look at every bit of news critically, only use trusted sources and cross reference before making any investment decision. There are always other opportunities, don’t feel pressured into making snap decisions and let schemers prey on your emotions.
How To Spot A Pump And Dump
Always pay attention to a cryptocurrencies trade volume. Legitimate cryptocurrency projects are consistently doing trade volume in the 10’s or hundreds of millions per day. No pump and dump group is large enough to fake this sort of trade volume.
If we go back to E-Coin, we can see that in the month before the pump, the highest 24 hour trading volume was less than $6k. If you see a dramatic increase in trade volume and an explosive increase in price, then chances are that the coin is being pumped and dumped. You can see below that it only took $40,000 to take E-Coin from a $30M market cap to $1.4Bn.
Are They A Scam?
In short, yes pump and dumps are dishonest and the chances are that you will lose unless you are the organiser masterminding the scheme.
What is horrifying is that some of these groups are posing a legitimate companies offering a valuable service to customers. CryptoCalls Elite have gone out of their way to create a pretty professional looking promotional video to recruit new members.
Don’t get pulled in by the promises of fast and easy money. Pump and dump groups really are a mechanism for organisers to profit from their followers, like a pyramid scheme.
There is a reason why pump and dumps are illegal in regulated markets like the stock market. They are not only dishonest but also harm many of the participants in the scheme. The allure of the pump seems to come from:
- The lure of easy money.
- The feeling that you are an insider on a scheme (when really you are the intended victim).
- Preying on the herd mentality; “everyone else is doing it, so should I”.
If you are a newcomer to the cryptocurrency markets, just be aware of what a pump and dump group actually is. If you still want to participate, then it’s your prerogative to make that decision.
Instead of thinking about pump and dumps, maybe a better use of time would be to research legitimate projects…