Dangers of the “FOMO Pump”
1st February 2021 |
Have you ever seen £500 disappear right in front of your eyes?
Go to the ATM, take out 25 £20 notes and stack them in front of you.
Now, watch as they magically disappear into thin air. Gone. To never be seen again.
You’ve just lost £500. How would that make you feel?
Let’s say this actually just took place. Would you now go back to the ATM, take out another 25 £20 notes, stack them in front of you at this magical desk and hope they won’t disappear again?
In fact, the second time you stack the notes up, you’re not expecting them to disappear at all. You’re anticipating the stack will magically become 50 £20 notes. And if you’ve managed to get the magic right, 100 £20 notes.
But it doesn’t happen that way at all. The stack of notes just disappears again. You’ve now seen two lots of £500 disappear in front of your eyes. Maybe you just got unlucky…
So would you go back to the ATM and do it all over again?
What I describe is quite similar to how a good old-fashioned “pump and dump” works in crypto markets.
If you’ve never seen one, let alone been a part of one… they’re quite something to behold.
They’re also one of the most dangerous events you’ll see in the market. They’re also a quickfire way to watching wealth disappear right in front of your eyes.
But if you know how to spot them, get in, get out, or just avoid them altogether, then you’ll have some longevity in crypto markets.
If one happens to burn you, it may leave a lasting legacy that you might never come back from. That’s why I’m going to teach you about them today.
MazaCoin, Auroracoin and the 2013/2014 pumps
In 2013 bitcoin began to get a significant amount of attention from the mainstream. It was really the first major instance of coverage and awareness in the wider public.
The reason is that for the first time, one bitcoin surpassed the price of one ounce of gold. That alone sparked what’s been an eight-year battle between bitcoin “maxis” and gold “bugs”. That to-and-fro may never end.
But when bitcoin soared over US$1,000 for the first time in November 2013, people stood up and took notice.
In particular were the less scrupulous who saw this as a quick, fast way to turn hype and FOMO (fear of missing out) into personal gain. This saw the first period of altcoin mania, and rampant pump and dump schemes.
The idea that something like bitcoin could go from just a few cents to over $1,000 meant (theoretically) any crypto could do the same.
That meant all new crypto were being launched – mainly just copies of existing crypto, but pumped up with hype and excitement they would be the next great crypto for the masses. The big theme around then was a crypto that could be adopted by a country or large community, immediately drawing great distribution, great demand and a skyrocketing price.
Two of the big “altcoins” back then (by this stage, early 2014) were MazaCoin and Auroracoin. These were pumped and hyped beyond all belief. MazaCoin was destined to be the cryptocurrency of Native Americans, which would be the primary crypto used in their communities and importantly, in casinos.
That hyped MazaCoin hugely and it increased in price, going from around $0.002 to over 8 cents in about a week. Over 3,800% gain in a week. It went from $20,000 in trading volumes to over $1.6 million.
However, within two weeks the price had fallen back to where it started. Did MazaCoin end up being used by casinos and Native American communities? No. It was all just one big pump and dump.
As people bought into the hype train and bought right up to the high, the holders who had begun pumping the crypto were dumping on all the “noobs”. The end result, a select few made a great deal of money from a crypto that was and still is, worthless.
Auroracoin was a similar situation. The great hope and hype behind it was a crypto that the whole country of Iceland would receive and use. It would be the first instance of a whole country accepting and adopting a crypto.
It was actually distributed to the people of Iceland through airdrops. This saw its price begin to skyrocket, and it could then be bought on exchange by non-Icelandic people.
However, as its hype began to pump it higher and higher, those with larger holdings and those who received the airdrop just continued to dump it into the market. While it reached a peak value near $100 (around the exact same time MazaCoin reached its peak), it soon crashed as the dumping into the market sent the price tumbling.
Holding the greedy bags
These are two early examples of pump and dumps into the market back in 2014. In the seven years since, there have been countless examples of this.
They become easy to spot, mainly because the first thing you see is an astronomical price rise and it catches your interest. You then find that typically on social media and forums that there’s a lot of hype and a lot of “to the moon” comments about it.
When you then take a look at the actual crypto, the project, how it came about and what it’s trying to do, you find very little information. Sometimes, nothing more than a website. You find very little technical explanation, very little in terms of transparency, very little of anything.
Just a seemingly endless price rise and pump from “shillers” on social media. Sometimes you also find the actual trading volumes aren’t all that big to start with and that it’s only traded on a couple of obscure exchanges.
What you have to try and do is resist the urge to throw money into these, thinking you’ll be able to ride the momentum train.
Right now, the idea of momentum trading is very tempting in particular. To jump in following a pumping crypto is something to behold. What makes it worse is if you jump in and see fast value increases. You may have jumped on to the momentum, but then you expect it will go higher and higher and higher…
Sometimes it will, but it all comes to a fast, aggressive and vicious end. Often the end comes faster than you can react. Before you know it, you’re selling into a crashing market and sometimes find yourself selling out, to just cut losses as it heads lower.
But sometimes, you then see these crypto pump again. Having an anchor point and experience of getting burned before, you wait, and wait… and wait. Then as it passes your previous entry, sometimes even the previous high, you think, “Ahh this time it’s different.”
It’s not.
You get caught again, buy high, the market crashes and you’ve done your dough twice.
This might seem bleedingly obvious. But it happens all the time to people who aren’t investing for the crypto and its potential but merely for a momentum trade or because of the name or something silly like that.
We even saw a pump and dump play out last week in Dogecoin. It was earmarked as a crypto to pump by the WallStreetBets Reddit threads. And it did pump – it went from about $0.007 to $0.078 in about a day.
Those slow to react piled in expecting it to pump more.
It didn’t.
It was back around $0.025 within another day. The reason for this pump and dump? Nothing more than hype, a big chunk of FOMO and inexperience.
If you’re going to play these momentum trades, that’s fine, but know what you’re doing, and know that you will probably get your backside handed to you more than you’ll win.
The smart momentum traders tip in and tip out, only looking to make quick double-digit gains. And they’re prepared to lose it all. The silly ones tip in expecting they’ll perfectly time the market, maybe get a few hundred per cent out of it, doubling, tripling, quadrupling their stake and get out all fine.
They don’t. They’re often left holding the bags and sizeable losses. They’re also the ones that can’t afford to lose it all.
So, don’t play the momentum trades. If you hear something like Dogecoin is being pumped or XRP is being pumped by a Reddit thread, steer clear unless you’re 100% understanding and accepting of the risks you face – and only if you’ve got some experience in the crypto market.
But most of the time, like I do, just sit back and watch it happen. There are other and better ways to build wealth in crypto than trying to ride the good side of a pump and dump.
Crypto to Know: the future of exchanges
We’ve currently got three crypto on our “Crypto to Know” watchlist.
- Bitcoin
- Ethereum
- Tezos
This week I’m going to add a couple more to the list. In your next update I’ll explain more about them in detail as to what makes them tick. But for now I encourage you to read up on them, understand what they’re trying to do and how they fit into a future world of decentralised networks.
They are Uniswap and 1inch.
These are both decentralised exchanges. This is an exchange where you connect your own crypto wallet and can trade one crypto for another. They’re both Ethereum based, which means to use them you need to interact with an Ethereum wallet such as MetaMask.
Right now, they are a little complicated for a novice user. You need to be comfortable using and interacting with a wallet like MetaMask, understanding how ETH gas fees work and how you need to approve a token before swapping (exchanging)) for another.
That’s why I want you over the next fortnight to learn about MetaMask basics by reading up on it here.
Test run a MetaMask wallet to get used to interacting with Ethereum’s blockchain and learn about gas fees.
Also, read up and understand how to use Uniswap (here) and how to use and understand 1inch, starting with the “Getting Started” and “FAQ” sections (here).
That’s a fair bit to get through, but it’s important as I see these as being fundamental infrastructure of how we look to transact and exchange assets in the future. Get studying!
Regards,
Sam Volkering
Editor, Sam Volkering’s Crypto Network
