Submarine Wildlife in the Crypto world
Wait what?!
Dear Readers,
Following our first interview session to recruit Associates, we noticed that only few could answer to what a pump-and-dump was.
When it comes to investments in Crypto, one should be aware of what it is in order to avoid losing in the short-run considerable % of her/his holdings.
Disclaimers: the term of Days that you will find, refers to notable events — i.e. between “days”, there could be hours, weeks, months…
I. A few definitions
First, what is a Whale?
It is a group of individuals or an individual holding large amounts of USD in BTC that can influence the price of any Altcoin by buying huge amounts (price increase) or selling huge amounts (price decrease) of that Altcoin.
More specifically here is a Chart explaining the different types of whales out there — but we will call whale any investors larger than a Squid for a low market capped Altcoin.
Therefore, what is a “pump-and-dump”?
It is a technique used by those Whales.
As explained above, their purchasing power is large enough to create sometimes a 10% price increase by a simple buy order (but usually larger increases are possible).
However, they are smart, and to hide their true nature, they would rather do many small buy orders than a large one (with a few minutes between each small ones) to make it look like a natural growth.
II. Why would they do so?
The whale hopes to create a FOMO (Fear of missing out) as the mass would start buying right after or during her/his pump (pure speculation, as no news and no new info released or very poor ones), and the average crypto investors part of it, would not care — they would hop-on as soon as they would see a green candle and a +10% increase in the hour without looking at the buy orders history, or without wondering what eventual news could have caused this first 10% increase.
Following this FOMO, the first 10% increase would be only the first step — Day 1. As all the average investors would, all of them combined, have as much or more BTC than the whale we mentioned earlier -> a few hours after, the price would end up 25% higher compared to day 0. This is now Day 2.
Seeing all this, the FOMO has now become bigger, and new players start buying for a 25% more expensive price than at day 0. BOOM, price is now 35% higher than day 0, still nothing justifying so. Day 3.
Our whale is now satisfied the price went up by 35% compared to when he bought in -> he suddenly decides to sell off his holdings(tens of ‘000 of $) … Day 4.
The consequence of a $XX,000 sell order is not proportional to a same size buy order -> it creates more FUD (Fear, Uncertainty and Doubt) than the buy order created FOMO.
The price decrease might be only 10%, like the increase was (larger impact on the overall price though), but this sudden sell order brings fear to smaller whales and to ALMOST ALL the average investors that might also sell instantly all their holdings as well (formation of a huge red candle), the same hour or the same day -> price could decrease by at least 40% or more as you can see in this chart.
But this is simple math -> If the price increases by 35% between day 0 and day 3, the token price that was let’s say at $1 at day 0, was afterwards at $1.35 at day 3.
In case the pump and the FUDs it generates causes a 40% price decrease, you would have a price of 0.81$ after day 4…
You could not buy at day 0 like the Whale did because the price was already at $1.10 after her/his multiple orders, therefore, in the best case scenario, you bought close to $1.10 (maybe a bit below in case you bought during her/his pump).
But some bought at $1.35 (obviously, as some sold at that price -> e.g. our whale).
So after the FUD, you would end up with (0.84–1.10)/1.10, i.e. -23.6% in case you bought at $1.10.
If you were part of the latest joiners, i.e. buying at $1.35, you would be down at -37.8%.
Generally, the pump-and-dumps are smaller, but this happened a couple times, for instance some $EDG token buyers bought above $1.20 expecting huge news the next week but mostly because of FOMO (no news came out, and apart from a news expectation nothing changed a bit in the actual product). Its price is far below $1.20, actually far below $1 as you can see below.
However, this is a dangerous game for Whales as well — as they can never know if there is not a larger Whale out there that could dump the price before they do.
And what if a whale already bought in before, call it Day -1 at $0.90 (for the token we took in example at the beginning (i.e. 1$ at day 0)), you can bet he is going to dump before our Whale from Day 0 does.
We hope this short article will help our new investors, or current ones, identifying a pump-and-dump from an actual healthy growing stock following a news.
On the behalf of the BBCA Team,
Donat Hortion
