The Anatomy of a Pump & Dump scheme
As you might have seen, we have a popular post about Telegram crypto Signal channels. Once you dive into the search for crypto signals on Telegram, you will find your way into Pump and Dump groups – sadly there is no way around. Recently they call themselves “Pump and Hodl” to cloak their shady intentions. One thing to remember: There is nothing like a free service that will make you rich instantly. Not in crypto, not anywhere else. You will burn your fingers if you put it on the hot plate and this article shall protect you and show you how smart traders even exploit the Pump and Dump scheme a bit.
This article is about:
- Clarifying what a Pump and Dump is
- How Pump and Dumps actions work on Telegram groups (and why you will always get dumped in free groups)
- Understanding the anatomy of a Pump and Dump
- Identifying Pump and Dump groups on Telegram to avoid them and to protect you from getting burned
- Knowing about upcoming Pump and Dump coins – even before the actual pumpers know those coins themselves
- A conclusion about Pump and Dumps
But first things first – Let's clarify what the term “Pump and Dump” actually means:
What is a Pump and Dump?
A Pump and Dump is a planned market manipulation on low volume coins, exploiting the possibilities the young crypto markets offer. Whilst many people believe that the financial markets move in some kind of randomness or are visualizing a certain mass psychology of investors, most of the prices are gamed. You can see this in the traditional markets since ages, but it is way more easy in the juvenile crypto markets.
So many shitcoins, which nobody cares about anymore – and even knows about, but still, they are tradeable. These coins have now significant trading volume and are way to easy to manipulate for trading groups like on Telegram or real whales, that move in and out, leaving a mess of burned traders behind. Manipulation is omnipresent, especially in the world of crypto as there are too many easy chances to do so.
To sum up, a Pump and Dump is an organized market manipulation, often issued by multiple telegram “signal groups” to pump up a dead shit coin that barely moves. The groups spread unimportant upcoming news of that shitcoin as a reason why it goes up. The issuers behind the Pump and Dump accumulated and set up their positions early, then they start together with the community the actual pump. The signal to the user of the free channels will be given, once the coin is already pre-pumped, the novice traders see big green candles, want to jump in, but the group behind already pulls out and uses the traders buy orders to get their sell orders filled fast.
At the end of the action, many traders will have bought the top of the candle and will be left with a big bag of a dead shitcoin, while the pumpers profit.
How Pump and Dump groups operate on Telegram
The operation works as follows: A few admins of big telegram groups for “free signals” unite and try to establish collaborations with other telegram group owners to widen their audience and maximize the impact of their pump and dump group. They search for a shitcoin with certain qualities to qualify for a Pump and Dump action (we will show you that later in this article), analyze which one is the easiest to pump and then internally vote for a selection. Usually, they take coins that are not to be found within the Top 75 (Coinmarketcap / trading volume) and show a decrease in value for a longer time. The pumpers often have paid groups, stacked by entry fees. By paying higher fees gets you in the “accumulation group” which lets you buy the coin in the accumulation phase, completely unpumped. The cheaper groups get you an account that will notify you about pumps in a later phase, where the price has gone up already. Basically, they will be notified with the pre pumped coin and able to get in early but not with the full advantage of the pump.
The instruction is to buy in small stacks, often with a max of 0.2 Btc or less, so the coin does not look pre-pumped to the eyes of other traders. Within the completely free channels, you will now see bot-posted messages like “Next Pump & Hodl Signal in 15 minutes” across many of those channels. 5 Minutes before the start they often start with the almost golden line “Login your Bittrex”. At this time the guys behind the Pump and Dump action accumulated already big sums very slowly, after that the paid members have been enabled to fill their bags. You, the free channel user is the one that pays the profits for the others.
Now the cooperating channel admins that spread the signal to their members, get the opportunity to participate and buy another high amount. When the signal gets finally posted across all those signal groups, you will see already an artificial huge green candle. The pump signal will be posted in all those channels (often with impressive member counts by the way) at the exact same time and the free signal group members buy this shitcoin like there is no tomorrow. The price increases short-term, but the pumpers already agreed upfront to a particular percentage growth, usually 20-30%, when they are going to dump it. Congratulations, you have been dumped.
The Anatomy of a Pump and Dump
Pump an dumps follow a replicable methodology, the preparation takes some footwork first and the pumpers usually go through the following steps until the final dump happens. It is like the blueprint for most of the pumps and dumps:
Step 1: Accumulation
We talked already about the accumulation phase we are going through to build up our positions in general. Not meaning we are doing that to participate in a pump and dump, though there are similarities how pumpers are doing this. Pumpers want their action to be cloaked, so the price doesn't drive up before the actual pre-pump and pump. They open up hundreds of tiny micro buys to build up their position over time, trying not to generate spikes on the chart. If the coin volume is very low, this spikes will be unavoidable, as the position building would take very long. On low volume coins, spikes will appear in the preparation phase, having the advantage for the pumpers to shake out the bagholders (as they are happy the price increases and they can get rid of the shitcoin) and to increase their market share. Furthermore, the pumpers use fake walls to suppress the price to grow to early. We explained fake Buy / Sell walls here. Basically, the pumpers put up huge, unfillable sell orders, so the order book looks like the price would be dumping hard anytime. This shall scare other traders and make them sell, so the pumper can buy more of the coin at discount.
Step 2: The Test Pump
Before the actual pump happens, there are – often a few – test pumps happening. This is done to test out the markets, the pumpers want to make sure that they are in control. Pumpers want to get a feeling where a possible resistance could be and how the overall sentiment of other holders is (like are there many weak hands in these coins. This is also another reason why they not only test pump but also dump the price a few times before the pump – weak hands must get shaken off first, to get more market share at the lowest possible price).
Step 3: The Shakeout and the Pump
Often pumpers are getting pretty aggressive with shaking out the weak hands. We have a perfect example where the price has been driven from an almost all-time low and to an all-time high – at the same candle. Nuts, isn't it? It is just another example of why crypto is not for the fearful.
Do you see what happened at this candle? The pumpers don't care about bringing the price to hell, as they know their social trading power and/or their bankroll is big enough to bring it back up anytime. So, to them, it is a limited risk. But all the unknowing traders getting scared and sell. All the scared traders getting stopped out even with their most liberal set stop-loss point. Now imagine you got the signal to purchase this coin while the candle grew already very much, your order didn't get filled and you are panic buying the top of that candle – you are rek't.
Step 4: The Dump
The pumpers use several strategies to exit their pump. It is important to know that they will get their profits from you guys, that are buying the top of the candle because of following late pump signals on telegram or whatever other sources. The pumpers have whether setup micro sells all along the pumped candle or they dump into a buy wall, they see. There are much more advanced methods available to them, like buying into their own walls repeatedly to create more FOMO and once people start buying as well, they buy into the already setup sell walls to exit the pump in small steps.
How to identify Pump and Dump Groups on Telegram
Login Bittrex… Signal in 5 minutes
If you read a line like this – unsubscribe the channel, simple as that. This phrase is used by most of the pump and dump channels and sooner or later you will have hard hits on your funds with this kind of advice. You are the last in the line, the guppy in the shark tank. But let's take a wider swing. “The Internet – oh you universe full of free things…” Maybe not as free as some people might think. Most of the services offered for free, take a hidden fee. Take Google, take Facebook – you pay by participating your data into the big data pool. Most of the free signals channels will make you pay with your lost funds, you indirectly pay the pumpers by being dumped. There are some free channels, that offer a paid channel also and they often give a fraction of their signals with a slight delay in the signal channel without fees. You will be advertised with cross-promotions and once you get into that cycle you will end up in a pump and dump channel – be aware.
Here are some indicators that you landed in a Pump and Dump channel:
- They use a timer for the next signal and write something like “next signal in 60 minutes”, “Login Bittrex now!” and so on you name it.
- The published signals are for coins you never heard of in general.
- Once you open the chart you see many tiny candles, followed by a big candle and the suggestion to buy into this candle.*
- They post some news for that coin, that might appear very unimportant. It is a pseudo reason for the sudden rise.
- They push you hard to hold that coin no matter what comes, making sure their sell orders get filled.
- They push you to spread this news in social media.
- You see the same signal posted in many channels.
- They don't share any technical analysis at all.
*Keep in mind that a similar picture can appear with legit coins. If a real breakout happens, you can jump into to ride the wave, though it is unlikely that this happens for the shitcoins they use for their pumps.
How to earn from Pump and Dumps, without actually participating in it?
Despite there are several scanning bots which do volume checks and look for buy/sell pattern to alert you, there are ways to manually scan for possible upcoming pumps. We don't advice to use this method as it is risky, but we share it here with you, as many traders are using it, to earn from pump and dumps, without being part of it, or even without knowing about it.
Just like in “The Art of War” you have to see the fight with the eyes of your enemy, think like he thinks and abstracts his moves to exploit it. Pump and Dump groups are following a methodology on how they select their coins, and what we explain here is, how to find out what these coins could possibly be – maybe even before the groups know it themselves. If you decide to try this out (which we do not recommend), you should go very small. You need strong hands and sometimes lots of patience until the action starts. Hodl & patience are far easier, when you don't have your life savings within the trade, but just a fractional amount you can effort to lose or end as a bag holder.
Time To Get Spoon-fed
These are the 10 steps some traders use to earn from pump and dumps, before the pumps start:
- Open the Biggest Losers on Coinmarketcap.com (scroll down to see them)
- Change the currency from USD to Btc
- Change the last column to 7 days
- Open all coins with a volume between 10-20 Btc in a new tab.
- Check against the normal Coinmarketcap Rankings, the coins must not be in the Top75. Close the tabs that have a higher rank that #75
- Now see the charts for each of them in the 30 days range. Close all tabs, where the charts indicate spikes of more than 10%.
- You should come up with a list of 5-10 coins max.
- Now you have some really low sitting coins, with low volume and no recent pumps. That is what pumpers are actually looking for. Traders, that want to exploit that knowledge spread some funds over the analyzed coins and just wait. Commonly they should get pumped within the next 10 days.
- Some set a stop-loss of up to 5% depending on your risk-taking propensity.
- You are looking for a 20 – 30% percent growth to take profit.
Pump and dumps are dangerous if you are not in the inner circle, which is planning and executing it. There are some groups that allow early access to these pumps, usually for a steep fee. Still, the risk is there, that these pumps don't work out. We talked about that free signal channels are mostly not free and the risk is high to fall for a pump and dump group on telegram if you are randomly joining by cross-promotions. You now know the red flags to recognize those groups early and learned in depth how pump and dumps work / what the scheme behind is. We also saw how pumpers choose their coins for pump and dumps and how some traders exploit that methodology to positing themselves early in such pumps. Pumps and Dumps are an art form on its own, however, it is a shady art that produces loss for novice traders. In the end, trading is a zero-sum game – if you take part, you have to be able to take a loss – Pumps and Dumps, though exploit the unknowing and leave them with no chance. No technical or fundamental analysis will help you once the pump group dumps on you. It is good advice to stay away from low volume shitcoins, unless you know what you are doing. If you are into a legit coin, all you need to do is hold, once you are in loss – the odds are well that they will return and even increase. If you are in a shitcoin, odds are well the value will dry out more and more. So stay aware, stay careful.