What is a Pump and Dump in trading?

A Pump and Dump is a market manipulation practice aimed at creating an artificial demand for a cryptocurrency (or any other asset). Unscrupulous investors then take advantage of the rise in price to sell their cryptocurrencies and thus make a significant profit on the backs of trapped investors. How to avoid being the victim of a Pump and Dump and how to recognize one?



What is a Pump and Dump?

A Pump and Dump (translatable as “Inflate and Release” in French) is a fraudulent practice of market manipulation

in which influential investors buy a large amount of a low-priced, illiquid cryptocurrency.

They then spread positive rumors about the cryptocurrency on social media and other channels to encourage other unsophisticated investors to also buy it. thereby creating an artificial demand for cryptocurrency.

This artificial demand drives the price of cryptocurrency higher, attracting more investors who think they can make quick profits by investing in the latter. The individuals behind the Pump and Dump then take advantage of this price increase to sell their cryptocurrencies, thus making a significant profit.

However, once these individuals have sold their cryptocurrencies, its price starts to falloften in a very brutal way, which generates significant losses for trapped investors and not aware of being at the heart of market manipulation.

It should be noted that this practice is in no way exclusive to the cryptocurrency market, it also affects the stock market. However, since many cryptos have extremely low liquidity and the sector is not yet sufficiently regulated, unscrupulous individuals can quite easily set up pump and dump operations.

Of plus, creating a new cryptocurrency is within anyone’s reach for just a handful of dollars. Thus, it is not uncommon for cryptocurrencies to emerge for the sole purpose of creating a Pump and Dump with it. Often, cryptos of this type are referred to as shitcoins.

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Example of a Pump and Dump

Let’s quickly analyze a Pump and Dump pattern that took place on a BNB Chain token, the YYDS. A liquidity pool bringing together the YYDS and the WBNB is created on March 14, 2023 at 2:30 p.m. In just 10 hours and 30 minutes, this token explodes on the rise and shows a progression of more than 83,000%rising from $0.10 to over $187.

The liquidity of the token is then quite low, around 35,000 dollars to 60,000 dollars depending on the period. After this meteoric rise, the YYDS token collapses and loses almost 72% of its value in just 1 hour and 15 minutesdropping from $187 to less than $53.

A quick search for a certain YYDS token yields no results, whether on the web or on Twitter. So, it is possible that the YYDS token was shared in a private grouplike those often found on Telegram.

It is therefore very likely that it is a manipulation of the Pump and Dump typethose who initiated it having managed to sell their YYDS tokens on the backs of investors who were too uninformed about this practice, attracted by the lure of profit that was far too good to be true.

Pump And Dump Example

Likely example of a Pump and Dump on the YYDS / WBNB pair

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How to avoid falling into the trap of a Pump and Dump?

There are several steps you can take to avoid falling into the Pump and Dump trap.

Do your own research

It is important to do extensive research before investing in any cryptocurrency. Don’t just rely on rumors and investment advice you find online. Use trusted and verified sources for information on the cryptocurrency in question, such as its whitepaper and official website.

Avoid investments that are too volatile

Little-known, newly created, and illiquid cryptocurrencies may be more susceptible to being targeted by pump and dump strategies. This particularly seems to be the case for the YYDS example above. Avoid investing in cryptocurrencies that are too volatile or whose price varies suddenly over a short period.e. Don’t get trapped by the Fear of Missing Out, or FOMO.

Avoid investment opportunities that are too good to be true

Investment offers that sound too good to be true are often investment traps. Avoid investment opportunities that promise high returns in a short time.

Use a long-term investment strategy

Long-term investment strategies can help you avoid pump and dump pitfalls by allowing you to make informed investment decisions. Invest in cryptocurrencies whose underlyings you understand and which have a track record.

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