What Does Pump and Dump Mean in the Crypto Market?

Definition of Pump and Dump

The terms pump and dump are used to describe the price movements of digital assets in the cryptocurrency market. The widespread use of the terms pump and dump among investors and traders reflects the volatile nature of the market. Pump means that the price of a crypto asset increases suddenly and rapidly. Dump means that the price of a crypto asset suddenly and rapidly drops. 

Differences between Pump and Dump:

• Time Frame: Pump and dump usually occur in short-term price movements. Pump refers to a rapid rise in price, while dump refers to a rapid fall in price.
• Causes: Pump events occur due to positive news, investor excitement or manipulations, while dump events occur as a result of negative news, panic selling or manipulations.
• Investor Behavior: During pump periods, investors tend to buy, while during dump periods they tend to sell. The behavior of investors determines the direction of price movements.
• Market Effect: Pumps and dumps can increase market volatility and destabilize prices. These situations can create both a great risk and a great opportunity for investors.

How Do Pump and Dump Processes Develop?

Pump and dump processes consist of strategies based on market manipulation, usually carried out by an organized group. The main goal of these processes is to profit by first artificially increasing the price of a particular crypto asset (pump) and then selling it quickly (dump).

Pump Process and Examples

Organizing Manipulators

The pump process is mostly organized through social media or private groups. A group of investors chooses a low-volume and little-known crypto asset. Dogecoin (2021) - Dogecoin experienced a massive pump process due to the influence of the Reddit group WallStreetBets. Elon Musk's tweets also accelerated the pump process.

Creating Hype

Positive news, speculative comments and false rumors are spread on social media about the selected asset. The aim is to attract the attention of outside investors. Verge (2018) - A rumor of a major partnership announcement spread and the price skyrocketed. However, when the announcement didn't live up to expectations, a dump occurred.

Rapid Price Rise

The group makes coordinated purchases, driving the price up rapidly. This spike creates fear of missing out among other investors, prompting them to buy in. GigaCoin (2017) - GigaCoin's price was artificially boosted by coordinated buying by manipulators, then quickly dumped.

Dump Process and Examples

Reaching the Summit

When the price peaks, manipulators start selling in large quantities and the dump process begins. BitConnect (2017-2018) - BitConnect token peaked before the Ponzi scheme collapsed and then the dump process started, the price dropped by more than 90%.

Sudden Price Drop

The price falls rapidly with massive selling. The market panics and other investors start selling their holdings. Dogecoin (2021) - After the pump, many investors bought near the peak. However, there was a big dump in a short time and the price dropped rapidly.

Market Crash

Post-dump prices mean huge losses for investors other than manipulators. The value of the asset returns almost to its starting point. GigaCoin (2017) - Post-dump, the value of GigaCoin dropped to almost zero and many investors suffered huge losses.

Basic Stages and Features of These Processes

The basic stages of pump and dump processes begin with a particular crypto asset being low volume and volatile. Manipulators organize through social media, forums, or private groups and use fake news, rumors, and hype to create interest in their target entity. Then, the group makes large coordinated purchases, sending the price skyrocketing, and investors caught in FOMO begin making large purchases. 

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Manipulators start the dump process by gradually or suddenly selling their holdings when the price reaches its peak. The price drops rapidly and panic occurs in the market with large sales, and other investors begin to sell their holdings at a loss. As a result, the value of the asset returns, at best, to its initial level, while manipulators make huge profits. Investors left behind face serious losses.

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Why Are Pump and Dump Manipulations Done?

The main goal is to make big profits in a short time. Pump and dump strategies aim to create large price movements with small investments. Manipulators deceive other investors into buying the asset through artificial price increases and make a profit by selling at peak prices. In this process, while manipulators make huge profits, investors who enter the market later and buy at the peak suffer serious losses.

Methods to Detect Pump and Dump Tactics

Sudden and large changes in the price of the digital asset are observed in pump and dump manipulations. The biggest sign of such manipulation is when the price rises rapidly in a short period of time and then falls at a similar pace. Chart analysis tools and price trend tracking software can be used to detect such price movements.

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Large increases are also observed in transaction volumes. A sudden increase in the asset's trading volume may indicate that a group of investors is trying to push the price up by buying in a coordinated manner. Graph and data provider platforms that show the transaction volume of crypto assets can be used to monitor volume increases. 

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Social media and investment forums act as catalysts for the spread of pump and dump manipulations. Manipulators aim to influence investors by sharing misleading information and fake news on these platforms. For the reason, it is critical to check the accuracy of information and carefully analyze social media discourses to detect potential manipulations when making investment decisions. Extensive advertising and speculative comments on social media can be signals to pay attention to.

Is Pump and Dump Legal? Legal Status and Regulations

Legal Status of Pump and Dump Activities

Pump and dump activities are among the manipulative strategies that have long been considered illegal in financial markets. Such activity is common in cryptocurrency markets, which are not as mature as traditional financial markets. In most countries, serious penalties are imposed on those who engage in such manipulation activities. However, as regulation of cryptocurrency markets is still evolving, the legal situation and practices vary from country to country.

Regulations and Legal Measures in Different Countries

Those who participate in pump and dump activities face a wide range of sanctions, from serious fines to prison sentences. For example, in the USA, people found guilty as a result of investigations by the SEC have to pay millions of dollars in fines or are sentenced to prison. Similar penalties apply in the European Union, and regulatory authorities maintain strict controls against such activities. As legal regulations expand in Turkey, tougher sanctions are expected against manipulative activities in the crypto markets.

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In the United States, pump and dump activities are illegal under securities laws. SEC (Securities and Exchange Commission) enforces strict supervision against such manipulations and imposes heavy penalties on violators. 

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Pump and dump activities are also illegal in EU countries, and regulatory bodies have established comprehensive legal frameworks to prevent such manipulations. The EU's MiCA (Markets in Crypto-Assets) regulations also include measures against such manipulations. 

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Although regulations on cryptocurrencies in Turkey are in the development stage, CMB (Capital Markets Board) considers pump and dump activities in traditional markets to be illegal. Similar regulations are planned to be implemented in crypto markets. 

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Famous Pump and Dump Events in History

Dogecoin (DOGE) Pump & Dump (2013-2021)

Dogecoin was launched as a meme coin in 2013. However, it experienced a major pump in 2021 due to the influence of groups organized on social media, especially Reddit forums. Elon Musk's posts on Twitter also fueled this increase. Dogecoin's price increased by more than 1000%, but soon there was a massive dump and the price fell just as quickly. 

BitConnect Scandal (2016-2018)

BitConnect is considered one of the biggest scams in the crypto world. Working as a Ponzi scheme, BitConnect promised high returns to investors and created a large investor base with these promises. However, in 2018, BitConnect suddenly shut down and its token lost more than 90% of its value. 

GigaCoin (GGC) Manipulation (2017)

GigaCoin was launched as a small token in 2017. A group of manipulators carried out a pump by artificially increasing the price of GigaCoin. With the price increase, investors turned to GigaCoin, but manipulators sold their tokens at the peak and a massive dump occurred. Investors naturally suffered huge losses and the value of GigaCoin dropped to almost zero.

Experiences of Investors

In the past, many investors who were caught between pump and dump events faced huge losses. As in the case of Dogecoin, investors bought at a high price, thinking that the price would constantly rise but suffered huge losses when they encountered a sudden dump. In the BitConnect scandal also, many investors lost their savings and had long legal battles.

Lessons Learned from These Events:

• Avoid speculative investments. Pump and dump events are associated with speculative actions of manipulators. Investors should be careful not to get caught up in speculation and invest only in reliable projects.
• Consider high volatility. Crypto markets are inherently volatile. Rapidly increasing prices may be a sign of rapid declines. Investors should analyze price movements carefully and not get caught up in FOMO.
• Do not invest without doing research. Pump and dump events affect unconscious investors more. It is important to thoroughly research the projects, the developer team and the technology behind them before investing.

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Frequently Asked Questions About Pump and Dump

Is pump and dump legal?

No, in many countries pump and dump activities are considered market manipulation and are illegal. Such activities are subject to harsh legal sanctions as they aim to defraud investors.

How do I know if pump and dump is done?

Sudden and irrational price increases, unusually high trading volume, excessive hype and speculative comments on social media, pump and dump signs may be present. 

How can I take precautions against such activities?

You can take precautions by doing your research, using reliable exchanges, and trying not to get caught up in FOMO. Additionally, you can stay away from overly optimistic or exaggerated advice spread on social media and forums.

What are the long-term effects?

In the long run, it undermines confidence in the market, increases volatility, and often causes investors to suffer large losses. These destabilize markets and can deter new investors.

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