It's a plight witness how the cryptocurrencies are blending with the investment and the banking industry. Every other person in the industry  is having some or the other opinion about this buzz word. But in  reality, one just simply can't deny the fact that the crypto market is highly prone to risks, given the kind of price fluctuations it has. Needless to mention, this amount of risk always gives rise to a  skeptical aura in the minds of potential investors that whether the  crypto market is worth taking the chance or not. And to fill this gap or more precisely the dilemma, this is exactly where the pumps and dumps crypto schemes come into action and persuade investors to invest money in the crypto market.

But how do these schemes work and how can one face these schemes without getting trapped into the worse scenario is something one should be aware of before getting indulged  into the crypto market.

Source - Pixabay

What are the Pump and Dump Schemes And How Do They Work?

Pump and Dump is an extremely common term that is used quite often when we talk of asset investments. But one thing that has made it a buzz word today is cryptocurrency. Pump and Dumps are actually the schemes or techniques that are used to boost the price of a stock or cryptocurrency which have been witnessing a fall. This is generally done through ways like spreading false or misleading information about any particular cryptocurrency. The purpose of these schemes is to gather attention towards the cryptocurrencies which might not be in any highlight for quite some time or have been witnessing a continuous fall in their prices. Also, not all pumps are the result of bad practices. Some cryptocurrencies actually pump due to good news related to their business.

Now let's address the elephant in the room. How do these schemes tend to become so successful? In the world of internet and social media, it becomes quite easy to spread any required information among the people. This false inflation is done with well-planned strategies and the words get shared among the millions of people using social media platforms and their targeted ad networks. Once, the news is overheard by the investors, the purpose of the scheme is served. Since it's the good news  of the coin that is being fabricated on the front end, many potential investors start putting in their money and buy more crypto. In doing so, they clear all the sell walls and we see a rise in the crypto asset.

Source - Pixabay

How To Face These Schemes?

Pumps and dumps schemes are meant to seek the attention of the investors so that it could compel a maximum number of people to buy a cryptocurrency. But, it is often seen, once the investors buy the tokens, the pumped price gets dumped and this is where the investor realizes that he has been trapped into the successful attempt of the scheme. But is this really the end? No, it definitely is not. Undoubtedly, the eventual dumping of the crypto price will make you panic and you might feel that the investment that you have made is nothing more than a waste of money. But there are certain ways through which you can cover up these loses and even earn profit out of it. So, here is a list of how you can mitigate your loses even when you are in either position. Be it in a  pumping ride or a dumping ride.

  • Dollar-Cost Averaging (DCA)

DCA, in general, is an investment strategy in which an investor divides the total amount that he is willing to invest across the periodic purchases of a target asset. In our case, it is Bitcoin/cryptocurrency. This strategy is meant to reduce the impact of unsettled losses on the overall purchase. This works in either way. If you are in a pumping session, don't just invest all of your money in at one price. Try to invest 20-30% of your funds in the 1st round. And then, from there on, if the cryptocurrency takes a dump, 70-80% of your funds will be saved. However, if the cryptocurrency still manages to pull off a long pumping session, you can have your 2nd round of investment with another 20-30% of your remaining funds. This will help you to keep your portfolio to stay green while the whole market bleeds in red.

  • HODL The Door

This is probably the most common practice that is advised to a number of traders when the crypto market takes a swing on the other side, i.e. dumping side. When the cryptocurrency takes a huge hit and your portfolio gets drenched in 50-60% of losses within hours, instead of selling your cryptocurrency at losses, you can simply keep them intact, i.e. HOLD them. It is a popular belief in the crypto market that you don't make a loss until you sell your coins at loss. Having your portfolio in a blood bath doesn't mean you have made a loss. You will only make your loss if you SELL them at a lower price. Till then, it's just a phase. The crypto market always witness a number of huge rise and downfalls. Hence, just like after every night, we see a bright morning. It's the natural law of the crypto market that after every pump we witness a dump and the cycle is repeated

Source - Coinmarket Website Screenshot

Don't Wait For The Top Sell

If your coin is pumping and you are having a good ride, just don't wait  for the top-selling point or the all-time high (ATH). Like we have discussed earlier, a dump succeeds a pump and hence, the chances of you realizing that the top-selling point has come will only come after it has gone and left you in losses. The reason for not noticing this crypto dumping session is because when a coin gets dump, it's just a matter of minutes, mostly seconds when the prices go down. Instead of waiting for the top-selling point, keep selling small portions of your portfolio at regular profits so that when the coin gets dumped, you don't suffer a big loss, rather earn a smart profit.

Market Study/Industry Consideration

Once you get into a crypto pump or dump scheme, before selling off your coins for profit or losses, try to understand what is causing this  effect for that particular coin. Maybe the pump (which is genuine) is because of the news that says the coin is expected to be listed on a popular exchange. Till the time both the parties (admins of cryptocurrency and the exchange), haven't confirmed anything, the price of that cryptocurrency is expected to pump further. But once the news comes out, the market usually dumps that coin. This phenomenon is often called 'Buy The Hype, Sell The News'. Hence, a close watch at what is going on the market, i.e. in that particular crypto community must be taken care of.

One can join the Telegram or Discord group of that cryptocurrency to asses how the members have been reacting to certain news. If it's a positive one, then you can still enjoy the pumping session for a bit long. However, if the members are opposed to certain decisions of the admins that will be coming in near future, you better get off that coin with your profits.

Conclusion

Investing in cryptocurrencies and Initial Coin Offerings (ICOs) is always subjected to a huge risk and speculation. The dynamics of the crypto market are never fixed and with all these pump and dump schemes, the crypto market is even riskier. Therefore, it is always recommended to the investors that before making any move, one must conduct his own research. However, it is important to note that not all pumps and dumps are bad. Some take place due to genuine reasons. And as an investor, it is your duty to realize when to get out and when to enter into the trade which can be done by keeping your eyes and ears open in the market. And yes, common sense as well. Hope this article helped you.

written by Devashish