At first, you may be forgiven for thinking that it is very easy to spot a crypto pump and dump scheme as the signs should be there in clear view. After all, part of the approach of the scheme is to encourage more people to purchase the altcoin that they are targeting since this pushes up the price of the coin and they make more profit.
However, even though this is true, you clearly want to get in on the act as early as possible. Alternatively, you might also want to be able to spot one to avoid being caught up in the rush and panic to purchase the coin in question only to then discover that you have had your fingers burnt by simply not paying attention.
What is a Pump and Dump Scheme?
Before going into how you identify this scheme, a brief explanation as to what we mean by a pump and dump scheme is going to be in order. After all, how are you going to be able to identify it if you have no idea what it is that we are talking about?
The easiest way to explain all of this is that it is a type of trading whereby the market is manipulated for the benefit of those individuals, or companies, that are involved in the scheme. This is not something that is unique to cryptocurrency trading as it has been around for decades with a main focus on the equities market, but it has certainly taken hold in this particular market.
The quick explanation is that a pump and dump scheme in connection with cryptocurrency trading involves a group of people working together to artificially boost the value of a particular altcoin. They purchase a significant number of coins at the same time with this causing the value to increase quite considerably with this being known as the pump.
Once they have achieved their target price, which is agreed in advance, everyone in the scheme sells the coins, which means they are effectively dumping them back on the market. This will then drive the price in a downward spiral with the people in the group making a substantial profit.
How to Identify a Pump and Dump Scheme.
In order to identify a pump and dump scheme, the key is to be able to understand the trading charts for the various altcoins that are on a number of different exchanges. This is where you will be able to spend time studying the rise and fall of the various altcoins because that is how you can begin to spot some rather not so subtle changes in the values.
Often, you will be able to identify an altcoin that was previously unknown suddenly increase in value quite substantially and for no apparent reason. Indeed, there are some coin price charts that set in rates whereby there are triggers when a coin suddenly increases in price by more than 5% in 5 minutes. When this happens, the coin in question can then appear on a list as potentially being involved in a pump and dump scheme.
However, this is not the only way in which you are able to identify a potential pump and dump scheme.
The other common method is to pay close attention to certain news stories, and not the normal kind that come from real writers or journalists. Instead, we are talking about paid for stories that have a very specific reasoning behind their very existence.
Often, the coins that they focus on have a relatively small cap but the appearance of the story is then able to coincide with a significant upsurge in activity on social media networks and platforms. This can result in a small coin making a huge impact on the likes of Twitter and Facebook with profiles and groups all talking about this coin that has, up until this moment, managed to achieve very little at all.
Finally, if you realize that a particular altcoin that was small has actually managed to capitalize on the market, and it has absolutely no right to achieve this, then there is a pretty good chance that it has been pushed by artificial and fake methods.
Offering Some Protection from these Schemes.
So, we have shown how you can identify these schemes, but then how do you go ahead and protect yourself from them? Well, this is actually easier than you think, and it is all connected to the way in which you go about your business of trading in cryptocurrencies.
A main point is that there is a significant focus on coins that generally have a much lower trading volume. That is because they can be easily manipulated and the price can increase without much work. Also, when you study those charts and see that the price is soaring, then it is up to you as to whether or not you then want to go ahead and get involved in purchasing that coin knowing full well that the price will crash at any moment.
However, perhaps the best piece of advice when trying to identify a pump and dump scheme is to make sure that you do your research before you take action, and this applies no matter the side of the fence that you are on. Of course, it is entirely up to you to determine if you wish to participate in the pump and dump scheme.
As you can see, being able to identify these schemes is a lot easier than you may have previously been aware. As long as you can spend some time studying the markets and paying close attention to the movement of various coins, then you should get to a point where you can identify these pump and dump schemes even if you are not a member of the group yourself. Of course, as you see the profits that they can make then it may propel you into joining in because at least then you will be on the inside rather than simply standing back and watching what is going on.