Even though the creation of value exists in the cryptocurrency market, cryptocurrency trading is still a zero-sum game. Someone's gains are always somebody else's losses. This is the reality you need to make peace with, if you're planning on staying in the game for a long time. In fact, this shouldn't even be considered as a problem. As long as the game is fair and the same rules apply to all the players.
However, how would you feel, if you knew that someone made money from trading by cheating? It would be unfair, wouldn't it? This is why today we will be tackling one of the most relevant forms of market manipulation in cryptocurrency trading: The nefarious pump and dump scheme.
We will go over its main principles and explain them in detail. After that, we'll see some examples of it. We will also discuss some risk management strategies you can follow to prevent falling victim to it. This way you can be on your guard whenever you feel like it's happening.
What is a pump and dump scheme?
The pump and dump scheme happens in 3 phases:
Phase 1:
Violators start by accumulating a crypto-asset over a period of time. In this first phase they like to amass as much as possible of the asset in question. This ensures a huge return once they dump the digital security back into the market.
Phase 2:
Promotion time! Violators start spreading misinformation to pump the price of the cryptocurrency. This is in the hope of pumping the price of the crypto-asset.
Phase 3:
Finally, when the price is high enough for them, they start selling the digital asset. In other words, they start dumping it.
This is tremendously beneficial for the offenders. But it is extremely detrimental to buyers who invested in that same digital asset. This is due to the price falling down sharply. Leaving them with losses they can't recover from.
Examples of a pump and dump scheme
The FaZe Clan operation
FaZe Clan is an e-sports and entertainment organization. It has a lot of popular video game names under its umbrella. It is based in Los Angeles and was founded in 2010.
On the 2nd of July of this year, Decrypt, an online news and media platform, has reported that the FaZe Clan team has suspended four of its players for their alleged participation in a pump and dump scheme.
This scheme targeted the KIDS charity coin. Specifically, it was about a crypto project named "Save The Kids". Which vowed to give one percent of every transaction fee of its KIDS token to different establishments supporting the kids wellbeing.
Prior to its launch, the creators of the charity managed to promote the program. Not even 2 days after the launch, the price did nothing but crash by 90%.
The plague of Telegram groups
Even though people don't like to be the victim in a pump and dump, they do like to participate in them. Which is not the way to fight against this type of behavior.
In recent years there has been a surge in telegram groups specialized in organizing pump and dump schemes. The number of members of these groups can range from thousands to hundreds of thousands.
By gathering large numbers of people, they managed to manipulate multiple cryptocurrencies' prices. Price increases of up to 900% have been witnessed.
The main target of the groups in question is, usually, unpopular crypto-assets. Low market capitalization and low circulation are their bread and butter. This makes the cryptocurrency easier to manipulate.
Image credits: Josh Kamps & Bennett Kleinberg
Telegram group ‘Rocket dump’.
Number of members: Over 40,000.
Targeted coin: Yoyo
Cryptocurrency exchange: Binance
Conclusion
Trading in the cryptocurrency market is full of risks. Many traders use fair strategies to get an edge. Nonetheless, some of them can and will have recourse to inequitable means.
Subsequently, if you want to protect yourself from falling victim to these practices, you need to always be aware of every new way traders can use to manipulate the market. Or, at least try to. Then, you need to be proactive about it. Never wait for it to happen. Always strive to prevent being in the game while it's happening, if you can.
Keep away from chat groups that try to promote illegal behavior. As you don't like to be played, you shouldn't like doing it to others. On top of that, it could easily be a scam. Which is the case more often than not.
Moreover, a pump and dump scheme is but one of the many, many unfair plots that exist on the market.
For instance, there's wash trading, bear raiding, ramping, runs, churning, cross-market manipulation ... and more.
Consequently, I created a more elaborate article on my blog to include two more market manipulation practices: Cross-product manipulation and Spoofing. You can find the link to the article in the sources below.
