The cryptocurrency world is indeed full of great opportunities, but there are also quite a few traps that make people lose a lot of money. One practice that is often a bugbear for investors, especially those who are still newbies, is pump and dump. For those of you who are curious or have just heard this term, this article will thoroughly discuss what pump and dump is, how it works, and most importantly, how to avoid it so you don't get caught.

Understanding Pump and Dump

Pump and dump is a price manipulation scheme that is usually carried out in the crypto market. In this scheme, the price of a crypto asset is deliberately pushed up (pumped) by a certain group by buying assets in large quantities. After the price rises high and attracts the attention of other investors, the asset is sold massively (dump), so that the price drops drastically.

The main goal of this scheme is clear: to benefit the perpetrators who have already bought the asset at a low price and to harm investors who also bought at a high price, especially those who realized it too late.

How Pump and Dump Works

Pump and dump mechanisms usually involve several stages, and are often carried out in crypto with small market caps or low trading volumes. Why? Because these assets are easier to manipulate in price.

1. Coin or Token Selection

The perpetrators of this scheme usually choose coins or tokens that are cheap and rarely traded. The reason is simple, the smaller the market cap and trading volume, the easier it is to increase the price with relatively small capital.

2. Spreading Hype or Rumors

After selecting a target coin, the perpetrators start spreading the hype on social media, crypto forums, or Telegram groups. They use words like “moon,” “100x potential,” or “this is the next Bitcoin” to attract the attention of investors, especially those who don’t want to miss out on the hype.

3. Pump

The perpetrators started buying the coin in large quantities, causing the price to skyrocket in a short time. This price spike triggered FOMO (Fear of Missing Out) among other investors, who eventually bought the coin.

4. Dump

When the price is high enough and many investors come in, the players start selling their assets in large quantities. As a result, the price of the coin drops drastically, leaving new investors who bought at a high price at a huge loss.

Real Example of Pump and Dump

Pump and dump is not a new phenomenon, it has been around even before crypto became popular. In the stock market, this scheme also often occurs. However, because regulations in crypto are looser than stocks, this practice is more common in the crypto world.

One big example is the Bitconnect case. Although it was more of a Ponzi scheme, the pump and dump pattern also occurred. Bitconnect tokens had skyrocketed due to massive hype, but eventually plummeted to zero when the scheme was exposed.

Signs of Pump and Dump

To avoid becoming a victim, you need to know the signs that usually appear when there is a pump and dump scheme:

1. Unreasonable Price Spikes

If a coin suddenly sees its price skyrocket without any clear reason or fundamental news to support it, it could be a sign of a pump and dump.

2. Trading Volume Suddenly Rises

Apart from the price, the trading volume of the coin also usually increases drastically in a short period of time.

3. Excessive Hype on Social Media

If you see excessive hype about a coin on social media, especially from anonymous accounts or suspicious groups, you should be wary.

4. Coins with Small Market Cap

These schemes usually target coins with small market caps because they are easier to manipulate.

5. Promise of Big Profits in a Short Time

The perpetrators of these schemes often promise big profits in a short time. If you hear promises like this, consider it a red flag.

How to Avoid Pump and Dump

Here are some tips you can do to protect your investment from pump and dump schemes:

1. Do In-depth Research

Never buy a crypto asset just because of the hype. Always do thorough research on the project, including the development team, the project’s goals, and its fundamentals.

2. Avoid FOMO

Don't be tempted to buy coins just because the price has increased sharply. Remember, not all price increases are natural.

3. Pay attention to trading volume

Avoid coins with very low trading volume. These coins are more susceptible to manipulation.

4. Use Stop-Loss

Place a stop-loss on each trade to limit losses if the price drops suddenly.

5. Choose a Trusted Exchange

Some exchanges have features to detect suspicious activity. Choose an exchange that has a good reputation and high security like Binance.

6. Beware of Pump and Dump Groups

Never join or participate in a group that openly organizes pump and dumps. In addition to being unethical, this is also very risky for you.

Conclusion

Pump and dump is one of the most common traps in the crypto market, especially for new and inexperienced investors. This practice may seem tempting for the perpetrators, but on the other hand, it is very detrimental to many people.

The key to avoiding this trap is education. Don't be easily tempted by hype or promises of big profits in a short time. Always do your research, and make sure you only invest in assets that have strong fundamentals.

Investing is a marathon, not a sprint. Focus on the long term, and don't let emotions or FOMO control your decisions. That way, you can be safer and still profit in the crypto market.

Hopefully this article helps you understand more about pump and dump, and can become a smarter investor. If you have any questions or experiences regarding this topic, don't hesitate to share, okay!



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