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January 15, 2014, 04:05:13 AM |
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0. xcoin starts low.
1. pumper buys the xcoin for low, accumulate enough xcoins to manipulate the market. miners can either premine or initial mine at low difficulty to obtain a controlling amount of xcoins (e.g. coinye was no-premine, but the dev initial-mined half a billion coinye b4 they decrypted the wallet for everyone else)
2. pumper starts selling xcoins high, encouraging other people to do so. it helps if you announce "i'm pumping!" to get people excited about this. (e.g. usually people say things like "hold xcoin!!! it's going places!" or "xcoin is undervalued!")
3. once enough people start buying in, the 'pump' gains momentum. at a certain time, pumper starts 'dumping' everything at the highest price.
4. people that do not know that the 'dump' is taking place continue to buy xcoin at high price at the same time 'dumper' is 'dumping.
5. as long as the pumpndumper sells first, they get the largest slice of the profit - the very peak of the rise.
6. where does the money come from, where does it go?
a. the money the 'pumper' gains is from the people that bought his coins at a higher price than the pumper paid for.
b. the profits made are on the backs of the people that were duped by the pump-and-dump, because they are convinced xcoin's price rise reflects a legitimate rise in value. in reality xcoin is just being manipulated for a short time, and only to directly benefit the pump-and-dumper.
c. after xcoin is 'dumped', the 'pumper' is left holding everyone's $$, and the people that bought in during the pump get left holding a whithered husk of xcoin.
7. what happens to the xcoin? pumper doesn't care. if it dies, it dies. if it keeps going, wait a few days/weeks and then repeat.
the suckers/marks get into the 'pump' because they are also speculators, and they feel they can get rich very quickly. however, the pumper has information asymmetry on his side: only the pumper knows when the pump starts, and when the dump starts. knowledge of timing is everything in a pump-and-dump: dump 5 minutes too late, and you've missed the peak, and buy 5 minutes too late, and you're paying too much for the coin.
the smaller the market cap of xcoin, the easier it is to gain a controlling share of xcoin, and the easier it is to manipulate. premining or not doesn't make a difference; you can pump-and-dump a coin with no premine as long as you can have enough xcoin to manipulate the market.
the simplest way to avoid a pump-and-dump is to simply avoid being seduced by the get-rich-quick. if you take a long term strategy and invest in a coin with good market position and fundamentals, you'll treat get-rich-quick schemes as short term scams. avoid arguments based on emotion, and instead invest only in what makes sense from an economic standpoint.
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