Pump-and-dumps are widely known as bad practices and in some cases are even illegal. But what is a pump-and-dump?
“Pump-and-dump is a manipulative scheme that attempts to boost the price of a stock or security through fake recommendations.
According to Investopedia, false recommendations are a necessary part of the process leading to manipulation. However, there can be exponential rises that do not go hand in hand with false recommendations and are reasonably justified. Cryptocurrency markets, like all markets, are governed by the law of supply and demand.
Jordan Belfort, known as The Wolf of Wall Street, made use of pump-and-dumps with clearly illegal tactics. A necessary part of that process was the use of very aggressive tactics that could involve the use of false information. He recently stated that many practices in the crypto market were clearly market manipulation. And if there were specific regulations, they would be prohibited.
A low trading level leaves room for such moves. Even unwillingly, a buyer can violently move the price up to quickly buy a large amount of tokens or cryptocurrencies. The same thing happens with sales, without properly distributing sales, it is possible that the price will fall sharply because the last buyer is found after clearing the order book in a relatively stable range.
It also happens in very liquid markets, such as the euro-dollar pair.
Following the Eurozone rate hike announcement we saw a sharp rise in the euro against the dollar which was offset by a large amount of selling at the U.S. open.
In Bitcoin we saw artificial volume from Terraform Labs, the company behind Terra Luna. It was back in April, before the LUNA and UST crash.
It was not fake news, it was auditable onchain. What is really relevant is that these falls occurred in low liquidity environments and therefore the fluctuations are explained due to lack of buying and selling volume. You can look for the next pump, the next big rise, but there must be some support, justification for that rise. This has been the case with Polygon MATIC.
It was up 3x from the June lows and up 2x on the Disney alliance news. In these cases we must remember that every impulse, however justified, has its setback. That lies in the impulse itself. Being patient and picking up the pullback from those pumps is often a good idea to avoid chasing green candles.