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Avoiding Market Manipulators: How to Make Sure You’re Not Getting Involved in a ‘Pump-and-Dump’ Scheme

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The crypto markets are still in their infancies, there’s no doubt about that. Because of that, most exchanges still operate as the Wild West of the financial world when compared to other asset classes. When trading on the foreign exchange markets, commodities, or traditional equities markets, there’s not much of a need to watch too carefully for market manipulators. However, the crypto markets are an entirely separate beast. 

What Is A ‘Pump-and-Dump?’

Just in case there are some out there who aren’t familiar with the tactic, let’s break it down briefly. 

1. A group of traders chooses a low-market cap coin 

2. The group buys up a lot of the coin at a very low price 

3. The group then promotes the coin through various channels (Twitter, Telegram, Reddit, etc.) making claims about it going “to the moon! Get in here quick!” etc. 

4. The group pumps the price of the coin up by buying more and more 

5. Latecomers to the market have a fear of missing out (FOMO) and start buying the cryptocurrency as it gains in price 

6. The group then lets the latecomers FOMOing in drive the price to skyrocket 

7. After the price is high enough, the group that initially caused the price increase starts selling off all the coins/tokens they bought, dropping the price significantly, and effectively “dumping” the coin. 

Here’s what a chart of that looks like in the markets, as illustrated by GoCoinGo via TradingView:

crypto pump and dump example

How to Spot a Pump-and-Dump 

Of course, the best way to not get beaten by a pump-and-dump is to not get involved. That may sound easier said than done, but there are actually some really easy to spot warning sides traders everywhere should look out for. Though none of these alone completely confirms that you’re seeing a pump-and-dump, many factors combined can give you a pretty clear indicator. 

● You’re hearing news from different channels about something “really big” coming for an incredibly small market cap coin 

● A coin that is currently shooting up in price is seeing significantly more volume that it typically ever has 

● People are aggressively pushing you to buy-in from various channels like Reddit, /biz/, Twitter, Telegram, or other “crypto groups.” 

● Fake, unconfirmed news is being spread like wildfire online about a small market cap coin, yet there isn’t a single major news outlet or trusted source verifying any information 

● Buy walls and sell walls have been rapidly appearing and disappearing in the orders books and depth charts, this is a good indication of someone or group of people holding a large amount of a small cap coin (i.e. “market manipulation) 

Again, each one of these indications on their own is not a complete confirmation of a pump-and-dump scheme, but combined they are an incredibly useful set of red flags. Remember to always do research on the cryptocurrencies you’re interested in investing in so that you don’t fall victim to bad actors. 

Did You Know? 

Did you know that the U.S. government is actually willing to pay out bounties for those who can help in cracking down on pump-and-dump schemes? The U.S. Commodities Futures Trading Commision (CFTC) recently issued a warning about pump-and-dump schemes to help protect investors and traders in the markets. Along with that announcement, the CFTF also included a bounty program! 

If you’re an investor who thinks you might be getting lured into a pump-and-dump scheme, not only should you steer clear, but you can actually get paid for helping bring it down. If your efforts result in a successful enforcement action with sanctions of more than $1 million, you can receive compensation with a bounty reward anywhere from 10% to 30% worth of the enforcement! So not only is it a bad idea to participate in a pump-and-dump scheme, but there’s probably more money to be made breaking one down than participating in it. 

 

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