Understanding the concept of pump and dump

Hello dear friends,
It's another day of the week and today I have come to share with you all another interesting article which I title Understanding the concept of Pump and Dump. This is a phenomenon used always in the crypto space hence we will want to explain it to you today.

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In the market, there is never a time that the price of an asset will continually remain upward or continually remain downward and that is where the concept of pump and dump came to limelight. Without further ado, let's go straight into the discussion of the day.

What is a pump

When we talk about the concept of a pump in the crypto market, we are referring to an increase in the price of the asset at a given period. What this means is that you may see a market making some series of higher highs because investors have put in much money to purchase the asset at that period.

When these investors or manipulators of the market want to make their cash out, they will continuously buy a certain asset this will cause the buying pressure to be much and when that happens the price of the asset will pump.

Based on the law of demand, when the demand for the asset is higher, the price becomes very high too. So investors push this price higher by buying a large quantity of the asset which makes the price pump.

If you look at the chart above, you will notice that there was a pump in the pair of the asset we have presented and the arrow shows that the price moved from downward to a certain upward level. So that is to say that we had a buying pressure at that moment which pushed the price to that level.

What is dump

The direct opposite of a pump is a dump. These two phenomena work together in the crypto market. This means that when you notice a pump in the market, you should also expect a dump after the pump.

A dump occurs when the investors or manipulators of the market decide to sell off the large quantity of assets they bought which makes the price initially go upward. When selling these assets in large quantities, you will notice that the price declines and that leads to what we call dumping.

From the screenshot above you will notice a sudden decline in the price of an asset just like the price went upward. This shows that the selling pressure of the said asset is much at that moment.

In summary, both pump and dump are controlled by the investors. When there is a higher pressure in buying we see a significant pump and when there is serious pressure in selling we see a significant dump.

Causes of pump and dump

• Liquidity Issue
• Loose Legal Framework
• FOMO (Fear of Missing Out) Psychology
• New Cryptocurrency Issuance (ICO)

Liquidity Issue: Liquidity is one of the major things that causes pump and dump because whales or investors sometimes hold a larger amount of the said coin even more than the one in the market circulations.

So if these persons decide to sell off these assets, you will notice a significant decline in price because of the large volume of the asset that they are holding.

Loose Legal Framework: This is also another thing that leads to pump and dump. Crypto is not legally accepted in some parts hence people who have it sell off when any government regulations set in that will not be in their favor.

FOMO (Fear of Missing Out) Psychology: Fear of missing out on an opportunity is another thing that causes pump and dump because the little investors will want to jump into the market when it is going up or coming down and that may cause liquations of their asset.

New Cryptocurrency Issuance (ICO): When there is a new coin, investors tend to buy and hold much of it so that they can easily manipulate the price since nobody has the quantity they have. They can choose to sell off the asset leading to a serious dump or even buy more that will lead to a pump.

Conclusion

Pump and dump in the crypto market work hand in hand. If there is no pump there will be no dump. So everyone who sees a pump should also expect a dump. In summary, pump occurs as a result of buying pressure whereas dump occurs as a result of selling pressure.

Remember also that trading is like meditation, patience is the key. Always wait for the market to come to you and not for you to go to the market. Learn to identify your key support and resistance level and also trade with the trend and in that way, you will be a successful trader.

Finally, I want to thank you all for reading through my post today. If you have any questions or contributions, please do well to use the comment section of this post. See you all in my next publication.

Disclaimer: ^{This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your research and consult a financial advisor.}

NB: All images except otherwise stated are mine and taken from the TradingView website.