Whale alert! Pump and dump explained

Santiago S.

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Bitcoin Whales Pump and Dump Explained

Bitcoin price is susceptible to extreme volatility, making the charts look like a mountain range. Sometimes, it can drop 20 to 30% to jump back to its original price merely hours later. How can that happen? Most of the time, it responds to so-called pump and dump schemes, and here’s why you should never fall for them.

The whales behind the waves

Bitcoin maximum supply is and will always be 21 million. That means that price will never be affected by emission or inflation, as it happens with any fiat currency. Instead, BTC price fluctuates according to the law of supply and demand. If more people are willing to buy than to sell, the price goes up because it would be harder to get. On the contrary, if there are more sellers than buyers, the price goes down because it would be harder to get rid of it. 

That said, there are people (or organizations) that hold very, very big amounts of Bitcoin. How much? Well, enough to have a significant impact on BTC price. In the cryptocurrency community, these massive holders are referred to as “whales“. These, all together, hold approximately 40% of all BTC in circulation.

Pump it and dump it

Whales are not only massive in terms of balance. They are also greedy. As you might imagine, being able to affect the price, they have a lot of power over the markets. Making use of that power should not surprise you. If you look closely, you’ll see that they do it all the time.

If you’ve been in crypto for some time now, you’ve probably been through days where the price spikes 20-30% in a day, only to drop back down just a few hours later. It also happens the other way around. Most of the time, this volatility is caused by what we know as pump and dump maneuvers or schemes.

Crypto whales don’t feed on krill but on fear of missing out (FOMO) and amateur traders. They know cryptocurrency newbies aren’t used to crazy market movements, so they manipulate the market with these schemes to shake them out of their positions.

How do pump and dump schemes work?

A pump and dump scheme consists of a whale spending millions of dollars on a coin to drive its price up artificially. When regular traders and retail investors see that the asset is taking off, they buy in the rally, which takes the price even higher. A snowball effect keeps the price going up as more people get in. However, when the whale that started the rally considers that the price has risen enough, they sell their whole position, dumping their overvalued coins on the people buying in because of FOMO. 

Without the whale’s input, euphoria will eventually die, and small investors will start selling their assets too. Those who do it earlier may still make a little profit. Others may exit at break-even. Sadly, however, most of them will sell at a loss. Who gets all that lost money? Well, the whale that started the whole operation, of course.

It also works the other way around. Let’s say a whale owns 20.000 BTC at $50.000 each ($1 billion worth of BTC). Suddenly, it puts half of those Bitcoin for sale ($500 million). Selling pressure drives the price down to $44.000, triggering stop-losses and causing investors to panic-sell. That keeps the selling pressure high, making the price further drop to $40.000. Now, imagine the whale uses its $500 million to buy back the BTC it sold in the first place, this time for the low price of $40.000 each. Its position would now consist of 32.500 BTC. Furthermore, that significant purchase of BTC would generate buying pressure, probably causing the price to progressively recover. That way, they’d not only increase their BTC holdings but also their value in USD.

Of course, there are few people or organizations that hold that many Bitcoin. That is why pump and dump schemes are usually coordinated between various whales and happen in a mere couple of hours.

Don’t get eaten! The best way to prepare for pump and dump schemes

Lucky for retail investors and non-millionaires like you and me, some indicators help identify when pump and dump schemes might be happening. However, there’s never a way to know for sure, so rule #1 is to stay alert.

That brings us to rule #2, which is to always stick to your plan. It’s easy to let emotions, fear and uncertainty to affect us and lead us to make impulsive decisions. Many inexperienced traders chase pumps because of FOMO to realize their value gone within hours, whilst others sell at the bottom because they believe a coin is dead, only to find it bounced back up, missing a golden opportunity. 

Remember: whenever you feel overwhelmed, take a deep breath, clear your mind and remember your plan. If you don’t have one, make one. You should know before even buying in when you’re going to cash out. Set your goal and respect it. Shut down your computer if necessary. People who sell during dumps to escape losses are known as “weak hands” because they fail to hold their BTC and endure crises. Do whatever it takes not to earn that title.

The Crypto App has a tool to track your portfolio value over time. You can follow your profit and losses to make sure if you’re getting close to your goal. You can also check Bitcoin price and trading volume 24/7. Download the app here.

Good indicators to recognize pump and dumps are whale trackers. Thanks to blockchain technology and public access to information, anyone can check any wallet public address and see how many funds they hold. Whale trackers follow the wealthiest cryptocurrency addresses and send alerts whenever there are movements large enough to shake the market. For example, if you see someone transfers 10.000 BTC from a cold wallet to an exchange, there is a good chance that substantial selling pressure is incoming.

It’s a whale-eat-fish world out there

Sadly, there is not much regular people can do to pump and dump schemes aside from not falling for them. Remember to stay calm and follow your plan, and you’ll receive your reward. Most people learn this the hard way. Now, after reading this article, you’ve got a head start. Seize it. 

Happy trading!

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