Watch Out For Pump and Dumps in the Crypto Space
It is common for cryptocurrencies to fall victim to “pump and dumps” (even more common than with stocks) due to the speed at which orders process… and of course due to the fact that crypto prices are the result of a rather unregulated global market that trades 24/7.
What is a “pump and dump?” “Pumped” means the coin’s price gets pushed up rapidly or gradually by constantly by investors with deep pockets or groups of investors with deep pockets collectively. Dumped means the coin gets rapidly or gradually but constantly sold off by investors with deep pockets or by groups of investors.
Why Care About Pump and Dumps?
There are a few reasons to be wary of pump and dumps:
- To avoid panicking and selling a coin being dumped that has historically performed well (not every coin being dumped in the moment is worth selling off).
- To better understand when to get off a sinking ship (if a coins is actively being dumped, it can make sense to sell).
- To avoid panicking and buying a coin that is being pumped that has historically not performed well (especially not something you want to do for a long term investment).
- To jump on a pumped coin early and to sell quickly (to make a quick profit).
- To jump off a coin being dumped to take profits or cut losses (probably the most important lesson, especially if you had previously been invested in the coin).
TIP: If you are in a coin long that is being pumped, consider getting out (after riding the wave a bit) and flipping into Bitcoin with a portion of your coins. Then, if and when it comes back down, buy back in. This avoids you riding through both the pump and dump phase of your favorite coin (the pump will seem great, but the dump is not going to feel good). This being true if you aren’t concerned about taxes (the long term capital gains tax, which results in lower rates in the US for example, might be a reason to stay in a coin long despite a pump and dump).
TIP: A common tactic for pump and dumps is “spoofing.” Being aware of strategies like spoofing, pump and dump group tactics, and bots means being aware of the environment you are in. This stuff doesn’t always happen, but you need to be able to see it when it does and adjust accordingly.
Some Considerations on Pump and Dumps in Crypto
Most of the time coins that get pumped are low volume alt coins, like Trump Coin or Ether Movie Tickets. It can seem the excitement behind these coins is real, but often that excitement is the result of carefully planned manipulation on the exchanges and social media.
When off-brand coins like this see a lot of action, it is almost certainly a pump and dump.
However, sometimes major coins like Bitcoin and Bitcoin Cash get pump and dumped too!
In those cases it can be really confusing what to do, because it can be hard to tell if the coin is breaking out or correcting (or being messed with). Generally though, whatever you do, you want to do it methodically and not on impulse. That means you want a strategy in place for what you will do next time your favorite crypto holding gets pumped or dumped (so you don’t have to think on the fly and have time to research what is happening in the current market).
Another thing to think about is that sometimes coins get pumped and not dumped, or pumped or dumped for a good reason.
For example, sometimes legit news, a coin being listed on a major exchange, or a new upgrade gave everyone a legitimate reason to pump or dump a coin.
My best advice (not investing advice, but general advice for trading crypto) is simply to be aware that small groups of people go around manipulating coins. Thus, you should not treat every spike or drop in a coin’s price as a natural market reaction.
Lastly, if you see a major coin get pumped or dumped, research carefully. Generally a major pullback in price for a top coin means it is a buying opportunity. Likewise, a major spike in price of a major coin you have been holding can single a good time to take some profits and to carefully watch the coin (to see if it starts to get dumped).
Of course, what makes this all complicated and risky is that the opposite is sometimes true too. Sometimes what looks like a small dip turns into a big one, and sometimes what looks like a quick pump is just the first step toward new highs.
That is one reason that it helps to gradually enter and exist positions and to have a basic strategy in place.
I can’t and won’t offer specific investing advice here, but being aware of the reality of pump and dumps (and learning how to see that Matrix) will save you a lot of confusion and headaches moving forward.
TIP: If everyone gets all manic or depressive all of a sudden about a coin with a decent market cap and volume, it is a big red flag. Part of the strategy that manipulators use is the spreading of propaganda on social media. Thus, it is common for a coin about to get pumped to see a social media blitz.
TIP: Riding the wave to the top and selling on a pump can be fun… but generally the best investments over time involve buying major cryptos on a dip. Often the best time to buy into a coin like Bitcoin or Ether is when everyone is panicking, not when everyone is manically buying at a record high price… although, this is hardly always the case (especially with Bitcoin; I’ve seen it run up $2k or more in an overly exuberant market).
TIP: Say you do panic and want to sell. Consider trading out of the coin you are panicking over and into a top coin by market cap that has kept a steady price. Its sort of like moving to cash, but keeps you in crypto. The benefit here is that sometimes when one top coin falls, others rise. In the best case, this type of trade allows you to trade back at a profit when the other coin hits what you think is the bottom. Sure, this can leave you in a bad position, but its helpful to understand that coin-to-coin trades are an option.