Bitcompare Community

Margaret Boucher
Margaret Boucher

Posted on

Why do some coins experience price pump and dumps?

Top comments (1)

Collapse
 
vickysharp profile image
Vicky Sharp

Price "pump and dump" schemes are common in the cryptocurrency market, especially among smaller or lesser-known coins. These sudden price increases (pumps) followed by rapid declines (dumps) are orchestrated to manipulate prices for the profit of a few at the expense of unsuspecting investors. Below, I will explain why some coins experience these pump and dumps, how they work, and the key signs to watch for.

1. Low Market Cap and Liquidity

One of the main reasons why some coins experience price pump and dumps is their low market capitalization and liquidity. Smaller coins or newly launched cryptocurrencies often have a lower market cap, meaning their overall value is relatively small compared to well-established cryptocurrencies like Bitcoin or Ethereum. Low liquidity means there are fewer buyers and sellers in the market, making it easy for a coordinated group of people to manipulate the price.

Coins with low liquidity can have their prices manipulated more easily. It doesn’t take a significant amount of money to influence the market for these assets, allowing individuals or groups to artificially increase the price (pump) and sell off quickly once the value is inflated (dump).

2. Manipulation by Coordinated Groups

Groups of traders who want to make money by manipulating the price frequently coordinate pump and dump schemes. These groups typically work in private chats or forums where they decide which coin they want to pump. Once decided, they buy large quantities of the coin, driving up the price significantly in a short amount of time.

  • Hype and FOMO: As the price starts to rise, the orchestrators spread hype through social media, community forums, or chat groups to attract more buyers. This creates a sense of FOMO (Fear of Missing Out) among other traders, who see the rising prices and jump in, expecting to make quick gains.
  • Dump Phase: When the price has reached a certain peak, the organizers start to sell their holdings at the inflated price, causing the price to drop rapidly. This leaves latecomers, who bought in during the hype, holding the coin at a loss.

3. Lack of Regulation

Cryptocurrency markets are less regulated compared to traditional financial markets, which makes them susceptible to market manipulation. It is challenging to carry out pump and dump schemes in the stock market because regulatory organizations like the U.S. Securities and Exchange Commission (SEC) keep an eye on traditional stock exchanges. However, in the crypto space, there are no strict regulations preventing these types of schemes, especially on smaller exchanges or with lesser-known coins.

The anonymity of participants in the cryptocurrency market makes it difficult to track down individuals responsible for pump and dump schemes. Decentralized exchanges, which lack regulatory oversight, can also be breeding grounds for these activities.

4. Social Media Influence and Hype

The role of social media platforms like Twitter, Telegram, and Discord in influencing cryptocurrency prices cannot be overstated. Coordinators of pump and dump schemes often use these platforms to create hype around a particular coin, making it look like a legitimate opportunity for profit. Influencers may even be paid or incentivized to promote a coin, adding legitimacy to the hype and attracting retail investors.

5. Signs of Potential Pump and Dumps

Identifying a pump and dump scheme can be challenging, but there are some common signs to watch for:

  • Sudden and Unexplained Price Spikes: If a relatively unknown coin suddenly rises by a large percentage without any substantial news or updates, it could be a pump.
  • High Trading Volume: A sharp increase in trading volume can be a sign of a coordinated pump. Watch out for coins that see a dramatic spike in volume compared to their usual activity.
  • Heavy Promotion on Social Media: If a coin is being aggressively promoted by individuals or in multiple chat groups without any solid reasons, it could be part of a pump and dump scheme.

Final Thoughts

Pump and dump schemes are an unfortunate aspect of the cryptocurrency market, particularly among smaller and less well-known coins. Low market capitalization, coordinated trader efforts, a lack of regulatory oversight, and significant social media influence are typically the driving forces behind these schemes. For investors, it's essential to conduct thorough research, be wary of sudden price movements, and avoid investing based on hype alone to protect themselves from being victims of pump and dump schemes. Always invest cautiously, especially in coins with low liquidity and limited market history.