In the world of cryptocurrencies, where your asset can fly to the moon one day and crumble to dust the next, the term “plump” has become one of the most talked about. It intrigues newbies, excites experienced traders, and is often at the centre of media attention. But what is behind this tantalisingly shiny phenomenon, and how can you protect your investment?
What is a pump in the world of cryptocurrencies?
A bump in cryptocurrency and financial market trading is a sharp and often unreasonable increase in the price of an asset. Although the term “bump” can also be applied to traditional financial markets, in the context of cryptocurrencies it takes on a special meaning due to the high volatility and relative newness of this market.
It is important to note that pump is different from organic growth of an asset. Organic growth is usually due to factors such as innovation, new partnerships or positive macroeconomic news. In contrast, pump is usually artificial, caused by speculative action.
Causes of pump
Speculative behaviour: Sometimes traders or investors may start actively buying a particular cryptocurrency based on rumours or anticipation of growth, leading to a surge in demand and a resulting increase in price.
Market manipulation: Organised groups or individual actors with large resources may conspire to buy a cryptocurrency on a massive scale in order to artificially increase its price. Once a certain level is reached, these actors quickly sell their holdings, making a profit.
FOMO (Fear of Missing Out): This is the fear of missing out on an opportunity to make money. When people see the price of an asset rising, they may start buying it for fear of missing out on a chance to make a profit. This can reinforce an artificial increase in price.
Fake news and information attacks: Spreading misleading information or provocative rumours can be a catalyst for a pump, as traders react to news even if it is not true.
Pump mechanisms
1. Organised pumpa groups
Groups, often referred to as “pump groups”, meet in private chat rooms or forums. Participants agree on a time to buy and a target price. When the agreed time arrives, participants start buying the cryptocurrency en masse, which causes its price to rise.
After reaching a certain goal, the initiators of the pump start a mass sale, sometimes even before the rest of the participants, which leads to a sharp drop in price.
Most participants in such groups, especially newcomers, frequently fall victim to manipulation and lose money because they fail to sell assets before the price falls.
2. Spreading false news
Rumours or false news about a particular cryptocurrency are spread through social media, forums, or even some media outlets. This may include “insider information”, announcements about new partnerships or technologies.
Community reaction to such news can cause a sudden increase in interest in the asset and a corresponding price spike.
Traders who act on false information can suffer losses when the real picture becomes clear and the market corrects.
3. Technical manipulations
“Stack manipulation” (or “spoofing”) involves placing large buy or sell limit orders that were never intended to be executed. This is done to create the appearance of large supply or demand.
Another popular technique is bear traps and bull traps, in which traders can be misled by short-term price fluctuations to then face a reversal.
Untrained traders may interpret these artificial signals as real market indicators, leading to erroneous trading decisions.
Recommendations for crypto market investors
Education and self-education. Continuously educate yourself about the world of cryptocurrencies, the latest trends and methods of analysing the market. The deeper you're understanding, the less likely you are to fall victim to manipulation.
Critically evaluate information. Research sources before making a decision based on a news story or “hot” tip. False news and rumours are often the cause of pump.
Portfolio diversity. Don't concentrate all of your investments in one coin or token. Diversity can help mitigate potential losses in the event of a sharp drop in the price of one asset.
Set limit orders. Before investing, set a bar for asset sales in advance to protect your investment from too much loss.
Do not act under the influence of emotion. FOMO (fear of missing an opportunity) can be devastating. Try to remain calm and rational, even if the market is behaving erratically.
Stay in touch with the community. Membership in trusted crypto communities can give you access to up-to-date information, analysis, and advice from experienced participants.
Consider the history of the cryptocurrency. Before investing in a new cryptocurrency or token, study its historical data to learn about its previous booms and busts.
Be prepared for losses. Never invest more than you are willing to lose. The crypto market is known for its volatility, and investing in it is always associated with risks.
Regularly review your investment strategy. The world of cryptocurrencies is constantly changing. What was relevant a year ago may no longer be relevant today. Don't forget to adapt your strategy to the current market realities.
Manipulations such as “pump” are one of the many threats that crypto market participants may face.
Pumps are high risk. Sharp price swings often end in equally sharp falls, which can result in significant financial losses for investors who joined in buying at the peak of the rise.
However, by being aware of the mechanisms of such manipulation and following sound investment advice, you can not only avoid potential losses, but also move confidently towards achieving your financial goals. It is important to remember that in investing, as in many other areas, knowledge and education are your best shield and sword against risks and uncertainties.
