In the largely unregulated environment of cryptocurrency trading, however, bold and daring pump and dump groups of anywhere from 2,000-200,000 traders are slowly brewing.
Pump and dump schemes are some of the oldest tricks in the playbook of stock market scammers. In its simplest incarnation, a pump and dump scheme involves an investor or group of investors promoting a stock they own and then selling as soon as the price rises as the result of the endorsement.
The details of each pump and dump scheme tend to differ but the basic principle is that they all involve an attempt to shift supply and demand.
In the U.S., pump and dump is an illegal activity that can attract misdemeanor or felony charges including fines or jail-time depending on the extent of the scheme.
Unregulated Crypto Markets
In the crypto world, these pump and dump groups operate on a simple ethos: well-coordinated trades to buy low and sell high.
Pump and dump schemes tend to work best on small- and micro-cap stocks, and this fact is not lost on these crypto pump groups as they mostly target little-known altcoins.
The modus operandi of these schemes is quite thorough and ingenious: the group leaders recruit new members by sending promotional messages and spamming join links promising quick and massive returns to prospects via platforms such as Telegram and Discord. They then look for obscure coins and set a price target.
The leaders provide specific instructions to members including the exact time a pump will occur, the exchange and how the pump signal will be provided (images are mostly preferred over text to counter bots). Related: Japan Scrambles To Dodge Trump’s Trade War
The information provided can be pretty pedantic and include details such as 'target' inflation price. A flurry of reminders and inspiring messages are sent to members as the event draws closer to get the troops ready. Further, members are expected to promote the coin on various social media channels in order to create enough buzz.
Once the leader sends the signal, members flock to the chosen exchange and engage in a furious buying spree. Almost inevitably, the price spikes due to the high buying volumes. The members are instructed to hold until the desired price target is achieved, usually within minutes, before offloading their coins, again en masse.
The gains, though nothing like the 300 percent-plus advertised by group leaders, can be spectacular.
The chart above depicts trading activity for Genesis Vision, a little known 7-month-old Russia-based altcoin that took place an exchange known as Binance over a 24-hour period from January 13, 2018 to January 14, 2018.
The coin was trading at $29.22 about 30 seconds before a pump signal was issued by Big Pump, one of the largest pump groups with about 200,000 members. About 4 minutes and 16 seconds after the signal, the price had shot up to $45.21. Anyone who sold at the peak potentially earned a nice 55.51-percent return after deducting the 1-percent exchange fee. Not bad at all for five minutes of work.
The group launched a similar offensive on another little-known altcoin, Bancor, about a week later and managed to push the price up 22.3 percent before it crashed a couple of minutes later.
(Click to enlarge)
Average Investor Loses Out
The returns depicted above appear quite impressive on paper (or on a chart).
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The odds are, however, heavily stacked against the average investor right from the get-go.
Crypto pump groups operate on a hierarchy, with the highest ranking 'Top Promoters' receiving the pump signal a full 3.5 seconds before ordinary members do. A trader using trading bots can profit from a couple milliseconds advantage, let alone a full 3.5 seconds.
The rest of lower-ranking members are probably left playing a game known in behavioral finance as get-back-itis: getting into the trap of thinking they were close to hitting the jackpot and attempting to redeem themselves by participating in the next round of pump.
By Alex Kimani for Safehaven.com
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