Pump and dump is a form of fraud that involves the inflation of a particular asset price by feeding false and misleading positive information, with the intention to sell the cheaply purchased asset at a much higher price. Therefore, when the people behind the scheme sell their overvalued shares, the price falls and investors lose their money.
This is has been done by many scammers in the crypto space. The cryptocurrency market has many assets who possess a low market capitalization. When the market cap is low, it means that It’s easier “pump” that particular asset because the level of investment and orders required to move the price up will be lower than a highly liquid asset with a high market cap. Usually that’s the main idea.
In crypto, they usually create a telegram group and then fill it up with retail investors who have no experience. They give these people free “signals” and then people buy the asset and the price starts to inflate. By the time the asset is overvalued they already have a sell order placed. To whom do they sell it? Well, to the same people in the group. Therefore, they use you as leverage to get out of the trade and leave you inside forever. You won’t find a buyer to get out even if you try and sell before it drops because usually those assets have low liquidity, so not many people actually buy and sell them.
When people buy this, it creates an artificial inflation of the price temporarily but it quickly reverts to It’s original market price. I call this “synthetic growth” since It’s not real growth Its just hyperinflation because they create a buying frenzy. And It’s actually their own sell orders that trigger the downfall of the price while everyone inside the trade gets killed. It’s a classic scam, it has been done many times in the past on the stock market and now crypto. It’s designed to make a buck from people who don’t have any experience.
How can you protect yourself against it? Well, It’s very simple.
- Do not believe in any signal service before you see a proven record of profitable trades.
- Don’t spend your money before analysing the performance of the service.
- Make the time to follow the signals without spending any money
- If you see prices dropping in the blink of an eye and very few orders then it most likely will be a scam.