The Risks of Altcoin Pump & Dumps

The price per bitcoin is now quite high and so-called ‘altcoins’ are therefore tempting for many people. If a bitcoin can be worth that much, couldn’t that also apply to some other cryptocurrencies that are still dirt cheap? Moreover, altcoins sometimes rise by tens of percent per day and if you get in and out at the right time, you can earn a lot of money. However, appearances can be deceiving and sometimes that is even the intention. Read more about the risks of altcoins and so-called ‘Pump & dumps’ here .

Altcoins

Following Bitcoin, thousands of alternative cryptocurrencies have emerged. Sometimes this involves attempts to improve the technique, but much more often the main goal seems to be to match the price. In many cases, (large parts of) the Bitcoin code has simply been copied and reused to launch a new, competitive blockchain. With or without a small adjustment.

In many cases, the development process is highly centralized and housed in a single company, negating most of the decentralized features and leaving inflation policy entirely in the hands of the developers.

The makers often hope that the new cryptocurrency will catch on and become worth a lot of money one day. If so, they and other early owners will of course benefit the most. Usually little comes of it. There have been thousands of attempts and none have matched Bitcoin’s successes. In most cases, development comes to a standstill and there is no real economy or adoption.

Nevertheless, the vast majority of cryptocurrencies will continue to exist for years to come and sometimes even experience remarkable price increases. Not infrequently this is the result of a certain kind of price manipulation that is called a ‘Pump & Dump’ .

The ‘Pumps’

The purpose of a Pump & Dump is to buy up all sell orders of a particular cryptocurrency in order to bid up the price, thereby giving the impression to unsuspecting speculators that the price is rising, which may lead them to decide to enter and thus a cause further price appreciation. This in turn attracts new speculators who bid the price even higher. This part falls under the ‘pump’ , where the aim is to ‘pump up’ the price as high as possible.

An example chart showing the price movements of a typical ‘Pump & Dump’

When the price is high enough and there are enough speculators with buy orders in line, the initiator of the Pump & Dump decides to sell to cash in on the profit. This usually ends the price’s growth spurt, because the initiator usually sells so much at once that most of the buy orders are wiped off the table in one go. The result is a drop in price and a reversal of the trend. It’s the beginning of the ‘dump’ .

The Dump

Panic sets in during the dump . Many speculators are well aware that there is probably no question of a natural increase and are alert to a possible trend reversal. They therefore often protect themselves against sudden price drops by preparing sell orders ( stop-loss orders ) that take effect if the price suddenly falls below a certain level.

Typically, the initiator of the pump breaks through these levels on sale, resulting in a knock-on effect of sell orders driving down the price and thereby triggering new sell orders. In a matter of seconds, the price can collapse in this way.

Usually at that time there are a few new unsuspecting buyer victims ready to buy ‘the dip’ with new price swings as a result, but actually around this time it is a race for everyone involved to get out as quickly as possible before the whole house of cards has collapsed.

The initiator is usually the first to exit, often with a hefty profit in his pocket. A number of clever and observant speculators who have hedged themselves may also be able to take advantage. However, the rest now have a problem and can only sell at a lower price and accept their loss, or wait desperately for another price increase – which probably never comes.

The losses they incur during this process have more or less ended up in the pockets of the initiator(s) of the Pump & Dump .

More risk in small markets

This manipulation is theoretically possible in any market, but is more common in the altcoin markets. That’s because these are usually small markets that require relatively few resources to move the market. Particularly risky are markets with a low total market value, low trading volume and a limited number of trading venues.

A low total market value ensures that it is more affordable to buy up a lot. A low trading volume is in turn also important for a pump & dump , because if there is less trading, fewer buy orders are open. Relatively little capital is then required to buy enough buy orders to create the desired price movements. A limited number of trading venues is also a factor, as manipulation on one trading venue then exerts a greater influence on the market as a whole.

You often find this combination of factors with altcoins. You therefore regularly see (inexplicable) price increases in these markets, which are followed shortly afterwards by an even faster collapse of the price. In addition, a lot of altcoin trading takes place on exchanges that are not always known for their consumer protection and are sometimes located in regions where the rules are not so strict. It can therefore be extra difficult for victims to get redress.

Bitcoin

Compared to the altcoin markets, the bitcoin market is much larger, more mature and more decentralized, making similar manipulation more complex and risky. Not only is considerably more money needed to move the market (with all the associated risk considerations), but there are also many more trading places and many more players active on the market. At any given moment there are all kinds of forces that influence the bitcoin price and as the market continues to grow it will become increasingly difficult for a single party to influence the whole.

However, it is probably not that far yet. Similar manipulation probably also takes place in the bitcoin market and you don’t have to look far to find curious price movements in the bitcoin price. Yet the bitcoin market is a lot more robust and Bitcoin, much more than the altcoin markets, also has its own course due to its decentralized nature, apart from all the manipulations. Manipulation may therefore have an effect in the short term, but prove insignificant in the long term. For this reason, it may be helpful to view Bitcoin primarily in the longer term.

When comparing with other cryptocurrencies, it is also important to look not only at technological aspects, but also at the underlying economy and ecosystem. After all, an economy is ultimately supported by the ecosystem and the users – which are usually missing in the case of altcoins. Centralized attempts to emulate Bitcoin’s decentralization may well be inherently contradictory and unfeasible. Bitcoin is therefore unique, partly because of its special origins and that cannot simply be copied.

Be careful

We therefore advise everyone to be extremely careful when investing, trading or speculating in altcoins, even if it sometimes seems that large profits can be made with it. Historically, it has not proven to be a winning strategy and has resulted in major losses for most of those involved. For these reasons, among others, we, Bitonic, consciously choose not to offer altcoins.

Do you still want to invest in a cryptocurrency? Then we recommend choosing the least risky with the largest ecosystem and the greatest chance of success: Bitcoin. But, even then, don’t lose sight of the risks. Therefore, never invest more than you are willing to lose. Bitcoin is also still an experiment that no one knows exactly where it will lead.

buy bitcoins? You can do that at www.bitonic.nl

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