Like penny stocks traded on the NYSE or those on pink sheets, cryptocurrency is a prime target for pump and dump scams. For those with buying power, it’s an easy way to get rich quick by inflating the price. For everyone else, nine out of ten times, you will lose. This is one of several reasons people are afraid to trust Bitcoin.
For those of you who don’t know how the pump and dump works, it’s fairly straight forward. They are also illegal in the market, though federal agencies do not actively protect Bitcoin users.
Pump and dump scams involve two groups of people. First there are the players who artificially increase the price of a coin by promoting or endorsing it. They’ve spent several minutes, hours or even days buying up cheap coins, and when they are ready to dump them, they build up the buzz.
As buzz around the coin gains momentum, trading volume increase and the coins value goes up. You are both the pump and dumper. Once the coin hits a desired price the players sell all their coins, and people begin to panic sell, dumping their coins on the market and sending the price plummeting.
It’s not too difficult to detect a coin that’s being primed for a pump and dump. You’ll often see buying patterns like the ones in this graph. The price is falling and rising just slightly each time the players buy, loading up on the cheap coins without drawing too much attention.
Once they’ve purchase the coins the players head to the forums and chat boxes to talk up their coin of choice. They’ll use several different accounts, and there can be many players involved helping make this look real. The coin will be talked up until there is a buzz and people start buying – this is when the pumping happens. The chatter picks up on trading platforms, and people start purchasing the coin and pumping the price skyward. This fuels the buzz even further, and more people begin purchasing.
Once the coin hits a high point, the players will start selling off their coins, but not all of them at once – this signals the dumping process is about to begin. It can happen in a matter of seconds or be dragged out over hours. Players will sell small amounts of coins as fast as they can without dragging the price down until their out. Once the players are out, a panic sell begins, and this is when the dumping process happens. The price is no longer climbing the volume is down, and people start realizing their own sell orders aren’t getting filled. Panic sellers will sell below the market value just to get out, and this can send the coin’s value crashing to the floor.
The players are the ones getting rich, and they have the capital and knowledge to do so, but that doesn’t mean you have to lose out every time.
If you are able to spot a coin that’s being prepped for a pump and dump, you can purchase cheap coins yourself. If you were able to grab up some coins before the pump starts, you can make money if you’re not greedy. It shouldn’t be hard to make decent profit in five minutes if you’ve spotted the signs early.
If you come late to the party and the coin has already begun being pumped, but still in the early stages, you still can make a profit. Your risk will be greater and your profit smaller, but if your enter and exit fast the market fast you should be able to expect a modest return.
There are many people offering to “let you in” on the next coin to be pumped and dumped for a fee. Some people charge as little as .5 Bitcoins, but is it worth it?
Most of these are scams in order to get your Bitcoins. They will tell you what coin is going to be targeted but do nothing because they don’t need to. They have already made their profit. At .5 Bitcoins, with only five subscribers these people have already made over $2,000, which is about what you’d expect to make on pumping and dumping a coin, but now there is no risk.
Even if these offers for insider trading – that’s what it is – were real, and they did pump and dump the coin, you’d have to invest a significant amount of money to see a return of half a Bitcoin. Which means greater risk for you and a smaller return.
Buy the rumor.
Sell the news.
Information provided in this article is not intended to constitute an invitation or an inducement to engage in any investment activity. Featured image by Shutterstock.
Last modified (UTC): July 9, 2014 6:05 PM