With Bitcoin surging to a new one-month all-time high and rallying to $6500 over the past few days, more and more online community members have been expressing interest in investing in alternative coins, or more commonly known as cryptocurrencies. These digital currencies are referred to as virtual coins, developed to provide a decentralized money system.
It was first launched in 2009 by a certain Satoshi Nakamoto as a way to remove the third-party regulator. As opposed to fiat money, crypto coins do not have a Central Bank to monitor the money supply and manage the volatility.
It works by having a public ledger record every single transaction in the crypto community called the block chain technology. This prevents the issue of having a file replicated for multiple users, as in the case of e-books, mp3 files, PDFs, and other similar multimedia files.
The value of a certain cryptocurrency — the Bitcoin, for instance — is purely market-driven. This means that the buyers and sellers agree to exchange at a certain price, and this mechanism dictates the value of the Bitcoin at a certain time. This is also the main reason why its price substantially fluctuates. Compared to fiat money, these crypto coins have a certain limit on the number of units to be sold to the public.
While this kind of volatile investment has its pros and cons, there’s also an ongoing scheme that tricks investors into beating the market. One of them is the so-called pump and dump altcoins.
What is pump and dump?
The so-called cryptocurrency pump and dump is known as the synchronized buying that theatrically inflates the value of cryptocurrencies, in the attempt of drawing interest amongst outside buyers to then turn the currency’s price to earn profits.
These pump communities, organized by certain groups, aim to entice traders to participate by guaranteeing a sure way to earn money. These groups typically operate in messaging apps that appear to be committed to cryptocurrency pump and dump. Channels, organized group chats, and organizations on Telegram (a Russian messaging app) are used to organize pump and dump altcoins activities. Members are asked at the time of the pump to be prepared and are informed of the exchange venue in advance to ensure they are ready and that they have an edge, but then are only told the exact moment that the coin will be pumped. This is highly synchronized because the values of crypto currencies are highly volatile.
For instance, a group will send a public message through Telegram, saying that a certain amount will be “pumped” into Bitcoin (BTC). As a simple rule of supply and demand, higher supply will turn up the value, but this will also trigger behavioral changes amongst market players. Once the BTC has depreciated in value, they will be purchased by the cryptocurrency pump and dump members, who will sell it subsequently at a higher price, thereby earning profits. These communities have thousands of followers but some ads claim that more than 60,000 traders will be given the pump signal as the publication in question will be pooled with Asian channels.
The global markets for cryptocurrencies continue to be unregulated and so these pump and dump altcoins systems aren’t in principle prohibited — yet. Nevertheless, the same systems are illegal in the regulated financial markets that manage instruments with underlying value like bonds and stocks.
The rule of thumb when it comes to crypto money is to always invest what you’re willing to lose. Always keep in mind the popular saying in finance: No one can ever beat the market, not even the most skilled trading analysts.