Cryptocurrencies have been picking up speed in the past few years with more and more people getting into the virtual exchange market. Similar to stocks, investors and traders participate in the buying and selling of digital coins.
Cryptocurrencies are diverse, but the most famous is the Bitcoin. Other cryptocurrencies that followed Bitcoin aim to fill what they believed is lacking in Bitcoin and have been called altcoins. It is the merging of the words “alternative” and “coin.”
Altcoins can be mined, acquired/earned, or bought, and altcoin flipping can be done wherein traders use altcoins to exchange for Bitcoin. You only need a small amount of Bitcoin to start altcoin flipping (around 10–20 USD) which makes it easier for you to test the waters without losing as much as you would with fiat exchanges.
But, like stock markets, altcoin exchanges are not immune to scams, schemes, and even mining bots. And a trader can decide whether to ride the wave, set a strategy, or do a combination of both.
The Pump-and-Dump Scheme
A common scheme used in the altcoin market is the trending price scheme, “pump and dump.” It usually involves two teams, but a single person who can make a lot of accounts may be able to pull it off. One team will be those buying (usually) cheap altcoins. Once they acquired enough, the second team (or second step) is to pump up the altcoin bought. When a certain value for the altcoin currency is reached, they begin to dump the same. Please note that this scheme is illegal though the government doesn’t exactly have a firm hold on cryptocurrency exchanges.
How It Works
- Loading Up
A group of traders or a single trader with multiple accounts chooses a cheap cryptocurrency to prime for pumping. Players buy and sell in regular intervals to avoid being detected, but they will try and load up as much of the cheap altcoins without drawing too much attention on their transactions.
- Pump It Up
The second step is to get people to notice the coins bought. They would spread articles, post in cryptocurrency forums, speculate, and basically help their cheap altcoin gain momentum and attention, enough that others outside their circle start buying the said currency. This boosts the value of the coin, raising inflation rates. Panic buying may ensue as people who don’t want to miss out on the rising rates start to buy.
Usually, a target value for the coin has been accepted upon by the players, but the highest value may exceed their target. Either way, they will rake in profits.
- Dump It all
After the target price is reached, players start selling their altcoins in small bulks so as not to alarm other traders. But eventually all the players would have dumped all their coins causing the price to crash. Those who were late in the game and/or are not players will lose.
Winning Scheme or Strategic Scam?
Since this is a price trending scheme, nine out of ten, the pump-and-dump scheme is a loss for those who don’t have the buying power. Trends are after all always changing. But, if you see the pattern, it’s easy to make a profit so long as traders don’t get too ambitious and bail once they’ve already made some profit. Holding the coins for as long and high as it could go would also increase the risk when the selling price suddenly starts to fall as the players pull out of the scheme.
People are especially vulnerable to be scammed by “pump-and-dump” groups. These groups promise to update traders when they perform a pump for a cryptocurrency in exchange for some Bitcoin. The problem is that they wouldn’t need to pump to gain anything because traders already paid them to be informed about the next pump.
Still, there are some sites who claim that they are not scammers. They would use the Bitcoins sent to them to maintain the highest possible value for the coin, buying and selling to keep the rates as constant for as long as they can so everyone can make a profit.
An example of these so-called legitimate pumpers is Pump My Coin (https://pumpmycoin.com). Through contributions, they would have the buying power to maintain the market. They have both public and private elections to choose the top coins that they would pump. This ensures that spreading the news for the coins is easier, but the greatest profits would still be for their members.
It is for your discretion how you would approach these groups.
It cannot be stressed enough that pump-and-dump schemes are illegal, but federal agencies don’t protect Bitcoin traders. In essence, it is considered “inside trading” and gives an unfair advantage to players. Those who are discovered to use this scheme can face jail time and/or other punishment as dictated by the government.
A normal investor may choose to play with the sharks and ride along. Or some may have been pulled into the scheme without knowing it and want to get out with as little loss as possible.
- Spot the trend/pattern – traders will see a pattern when a coin is being primed to be pumped.
- Buy low – buy the altcoins that are exhibiting the constant rise and fall pattern and are starting to be pumped. If traders have already bought the coins before the pump, they should keep an eye on the market.
- Sell high (but not too high) – if investors are not too greedy, they’ll be selling your altcoins after profit and no more than that. This will allow them to exit with little problem or panic. Since they’re not an active player of the scheme, they’re not part of the exit plan as well, so better be safe than sorry.
- Quick escape – if investors see the pattern before either pumping or dumping, they may choose to sell immediately, less they be involved in criminal activity.
There’s nothing wrong with hyping or pumping altcoin. There’s also nothing illegal about selling the coins. That’s what the market is all about. Investors invest on cryptocurrencies they believe in and constantly keep up with its developments, spread good news of its potential, etc. Also, there’s nothing wrong with wanting to raise the value of your investment with factual information and research. The problem lies with the scammers that take advantage of price trending schemes like the pump and dump.