Investing in cryptocurrency can bring back immense rewards. But, at the same time, it can be extremely dangerous because of the high volatility in the market.
One of the biggest reasons for the high volatility is the lack of legislation and regulation of the market. Because of this, manipulation of the market is rampant, with groups pumping and dumping cryptocurrency all the time.
Many financial experts believe the cryptocurrency market will eventually be fully regulated. Until that happens, though, traders need to be careful with their crypto investments.
1. Positive Information Spreads Rapidly
One of the tell-tale signs of a pump-and-dump is if a lot of positive information about a particular cryptocurrency starts spreading rapidly online.
The architects of the scheme need to convince other unsuspecting people to invest in the cryptocurrency they're targeting to increase in price. They do this by publishing misleading and sometimes false information that reflects positively on a particular coin.
If the information you see online -- especially on social media and other investor boards -- doesn't match up with mainstream news on the coin, then it could indicate a pump-and-dump is happening.
2. The Information is Published on Informal Sources
A key indicator of a pump-and-dump scheme is that the positive messaging will often be done on informal sources. As mentioned above, this could be message boards or social media channels.
Because the architects of the schemes aren't recognized economic pundits or media gurus, they have to spread their word through other channels. So always check the sources of the information before deciding whether it's legitimate.
3. Mainstream Media Doesn't Follow Along
There are so many information sources for investors on mainstream media today that it is hard to miss if a golden opportunity exists in cryptocurrency. When new projects arise, or an angle presents itself, it's often covered by some of the most respected financial minds.
If this isn't happening for the particular cryptocurrency that's rising in price, then it could be a sign of a pump-and-dump. But, again, these schemes are led by groups that are not in the mainstream, so what they're often doing won't match what everyone else is saying.
4. Purchases Increase
Before the architects spread the news, though, they will start purchasing large chunks of the cryptocurrency. This ensures that they get in at the lowest price before others jump on the bandwagon.
If you see large purchases of a particular coin happening, then it could be a good sign to be cautious about that digital currency.
5. A Huge Sell-Off Happens
For a pump-and-dump scheme to work for the architects, they must sell their assets at a high point. So if you all of a sudden start to see a huge sell-off occurring with a particular crypto asset, then it could be because of a scheme.
Of course, as Dan Calugar points out, it may be too late to save yourself if you don't recognize this last point early enough. That's why you must always be skeptical of considerable rises in crypto prices until the market becomes regulated.
About Daniel Calugar
Daniel Calugar is a versatile and experienced investor with a background in computer science, business, and law. He developed a passion for investing while working as a pension lawyer and leveraged his technical capabilities to write computer programs that helped him identify more profitable investment strategies. When Dan Calugar is not working, he enjoys working out, being with friends and family, and volunteering with Angel Flight.