A Breakdown of the Cryptocurrency ‘Pump and Dump’
The Pump & Dump (P&D) money making mechanism has been very popular in the cryptocurrency space. The schemes are frequently found on chat applications such as Telegram or Discord. There are tons of crypto signal groups on Telegram which are commonly known as Pump & Dump groups. However, many have changed their name to “Pump & Hodl,” or “Pump & Chill” to obscure their shady activity.
In these Pump & Dump (P&D) group, all group members buy a specific coin at a time to “PUMP” its value. The increased value is known as the ‘pump,’ while the mass selling is known as the dump. However, one must note that there is nothing like a free service. Although, crypto investments can sometimes be considered a gamble; a quick way to get rich.
Moreover, most of these Pump and Dump groups are unreliable. Some crypto investors have a way to exploit the pump and benefit from it, but it would be considered a risky way to make money.
The whole P&D scheme has mainly two phases; the pump and the dump. There are other stages in the life cycle of P&D scheme. There are plenty of new groups formed daily, however, most of them are just operated by established groups with an intent to use it to profit off of the misinformed and inexperienced investors.
How do these groups work?
The whole mechanism of Pump & Dump works in layers, where the innermost member receives the highest profit. The layers include Organizers, Paid Inner Circle, Inner Circle, Paid Outer Rim, Outer Rim and Final Participants.
The organizers and sometimes few members of the inner circle decide the coin that is to be pumped. The information is then given to the Paid Outer participants of the group and the Outermost members.
The core layer includes; Organizers, Paid Inner Circle, and Inner Circle as detailed by Bitfalls. The core receives the information about the coin a few seconds before others. This Paid Inner Circle and Inner Circle are both paid services that the Pump & Dump group offers. The Outer Rim and other group participants are also paid services that get the Pump information after 30 seconds, or when most of the move has already occured.
Although these days it is very difficult to be a part of the core and if it is available it is expensive. Unless one becomes an organizer, which would be time-consuming, it is tough to be the part of the core in an established group. Therefore, most new participants that join these signal groups become are the outer layer of the P&D scheme. These participants do not profit heavily as the core and at times also lose money.
The P&D groups prey on low volume coins, because this characteristic allows them to effectively control the market. For instance, looking at the ask orders for a coin, let’s say it’s 50 BTC; then someone could spend 50 BTC buy the entire book and then set the price at that particular moment until new sellers come into play. P&D groups use low volume coins in such a way, where they can cooperate to manipulate the market over a short time period and are likely to be associated with ‘Whales‘ who can fund such campaigns (that is not to say all Whales are involved in malicious P&D’s and all are bad actors).
The Inner Circle
It is given that the organizers and the inner paid circle would benefit more. Organizers tend to buy coins in advance, at times before days to avoid traces.
However, the percentage of success can vary due to several reasons; a glitch while purchasing, wrong timing, technical issues. The whole scheme does not take very long to reach the outermost part of the member. Therefore it must that everything works well. The Pump & Dump scheme is completed in minutes, in rare cases, it could take longer.
The reason why these strategies cannot operate well for a long run as other factors start playing in. At times, many Pump & Dump arrangements overlap and create chaos in the market. None of these P&D groups are always profitable and reliable; it can go wrong any time as it is a very risky investment.
The frequency of pumps in the group varies, some pump coins several times a week where others do it few times a day. There are others who also do it fortnightly and monthly. The first thing organizers do is alert the members of an upcoming pump.
The countdown is set so that users are aware of the Pump. Then, the exchange is selected where the P&D is to occur. Most pumps happen on the smaller exchanges as it is easier to move the market due to the lower volume. At this time only the organizers are aware of the coin at this stage, which probably purchase a few days in advance.
Participants prepare themselves to purchase the coin as the countdown begins. Most load accounts with the amount they wish to bet during the pump. The reason to prepare in advance is that the whole game would end in minutes.
Also, participants have to check for stable internet connection and fast processing computer. If technical glitches arise, even the inner paid members will have to line up with the outermost circles to purchase coins.
The entire crypto space is flooded with bots that are capable of buying coins just with a single click. Additionally, fully automated scripts are also available where it collects the name of the coin from the group and purchases it on the exchange.
Once the coin is decided, organizers buy their load. It gives them a head start to receive the highest benefit from the spike. However, organizers need to be careful that they do not pre-pump the coin. If the coin is the pre-pumped, i.e., purchase of coins by organizers before the actual pump, they will lose their group fans, and none would take part.
Organizers need to be very careful to not pre-pump, i.e., if the coin volume on the exchange is low, the pump will spike the price. Once the group administrators have purchased, the information of the coin is passed to paid members and then to the outer participants of the scheme. If the pump is noticed by other traders on the exchange which are not part of the group, they too will purchase it.
Organizers who bought coins in advance now sell or dump their coins on the outer circle which is still buying due to the pump. The quick sale brings the coin back to its initial value or lower resulting in heavy losses for those who purchased the token at the later stage of the pump. However, at times it is noticed that pumps lift the price of the coin permanently or at least for a few days.
Another type of P&D scheme is the celebrity pump; most notable is the John Mcafee pump. The benefit is that celebrities have many followers, which leads them to influence the newcomers to the crypto market easily.
So how does this happen? Organizers select a coin, the celebrity is paid his or her fees to pump the given coin. For instance, McAfee pumped several coins using his influence while the alleged organizers dumped with the spike.
The Pump & Dump coins is a very risky scheme especially when you are not part of the inner circle. Although, overall this type of practice can harm the crypto space image on a longer run. If an influential person is asked by an anonymous person to dump on third-party coins, it could create an unstable market space.
The lack of regulation in the cryptocurrency market gives rise to such practices. Hence, it is best to research coins that will last over the long term and their purpose before investing in them.
By trading and investing in higher volume cryptocurrencies, researching promising lower cap coins above a certain volume threshold, for instance 10,000, 5,000, etc., BTC per day, and by learning technical analysis, you have a better chance of avoiding being caught up in the shenanigans of P&D groups.