Pump & Dump
Pump and dumps are famous in all kinds of markets, however they differ from real world to cryptocoin markets. Because cryptocurrency value is almost 100% speculation and very rarely based on news, traditional pump and dumps are a lot less common. In the real world someone can start a pump by simply spreading around some fake good news, this news will then draw in speculators and usually push up the price. In the crypto market, things are a lot different.
The first main type of cryptocoin pump is commonly seen being pulled off by the btc-e trader known as “fontas”. Someone with a large online following can pump a coin by simply announcing the coin will be pumped. As soon as the pump time is given, new or gullible traders will try to get in before the given time, unbeknown to them that they are the pump. As traders try to get in before the pump this will cause the price to shoot up, usually dragging in newbies (who think the recent rise in price means the coin is a good buy). Before long the price is skyrocketing and when the “pumper” sees that the price is high enough for his satisfaction, he will dump all his coins onto the wall of newbies who lie below. Although it is possible to make money in this type of pump, the majority of traders (skilled or otherwise) will end up with the pumper’s overpriced coins, which they will then have to sell at a loss. On the charts this pump will generally be a huge quick rise, followed by an quick fall of equal or more distance.
The second type of pump is performed by manipulators with deep pockets, instead of tricking people into buying in order to push up the price, they physically move the market themselves, drawing in speculators. The pumpers rarely ever dump their coins all at once, but prefer to slowly offload them onto new buyers, allowing the rise to continue. With these types of pumps the price rarely drops back to what it was before the pump, it’s also not uncommon for it to continue rising even after the pump stop.
This type of pump is what I’ll explain in the rest of the article.
Moving The Market
Obviously this is what actually moves the price upwards. Pumpers issue market buy orders to cause the price to move upwards. A single large market order would clearly be the doing of a manipulator, so the pumpers will place lots of smaller market orders of random size, in order to give off the impression that lots of people are buying. On exchanges which do not support market orders, the pumpers will use bots to automatically fill corresponding sell orders, like an exchange’s order matching system would.
If the pumper just goes crazy buying coins, it’s easy for the price to fall back down unless there are limit orders to support it. The pumper will, using a bot, place a collection of larger limited buy orders (walls) a small distance from the current price. The limited orders farthest from the price will be the biggest (usually in the $8k to $80k range), closer to the current price will be a collection of smaller walls (usually a few $k each). The general idea of the walls is to A: give the illusion of lots of people wanting to buy. B: prevent the price from falling back down.
The walls will usually appear before the pump begins and disappear at the end. Because the pumper is looking to hold up the current price and not actually buy coins: the limited orders will general be moved up automatically by bots, however remain a small distance from the price. By placing large walls at a small distance from the price, impatient traders will see a lot of “people” wishing to buy the coin, they will then place their buy orders in front of the large walls, so they will be executed quicker. By getting traders to jump in front of the pumper’s walls, the pumper achieve two things: They add more support for the current price and they use other people to absorb some of the sell orders (so that not too much of the pumper’s limited buy orders get filled). It is not uncommon for less determined pumpers to use “fake” walls, these are large limited buy orders that are automatically removed or moved down by bots as soon as they start getting filled.
Although market orders and Support walls a pretty much essential for any pump, this component is somewhat optional. Sometimes a pumper will place large limited sell orders using coins they already own. The limited sell orders serve many purposes: Preventing the price from moving up before the pump, pushing down the price to shake some of the weak handed sellers, build up buy pressure, and allow the pumper to buy more coins without moving the price too much. Often when the pump starts and the leash walls are removed, it may given the appearance that the current trend is over and that the market is likely to move upwards due to the apparently diminishing resistance.
There is always going to be people wanting to sell during a pump and it’s best to get rid of as many sellers as possible early on. A pumper will usually stop pumping for periods of time and move back their walls, this allows the legitimate buyers to absorb any sell orders. It’s common that the price will drop quickly during this period, causing weak handed traders to sell. Once this round of sellers have been shaken, the pumper can continue pushing up the price.
This type of pump is a great way to make money if you plan your exit, instead of holding until it’s too late. As a day trader I don’t mind people doing manipulation like this, not only does it provide the large rallies that we love, but it doesn’t come without risk. The pumper puts their funds on the line and always risks meeting a dump of equal size. It’s definitly a lot better than watching noobs losing their savings to fontas and his crew, thinking that he is going to push the price up and make them rich.