I’ve been trading with cryptocurrencies for almost 4 years now, and I’ll share my experience below. First let’s check the definition of Pump and dump:
A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.
When it comes to digital currency trading this usually means announcements all over the small cryptocurrency world, tips from “experts” on the trollbox chats, posts about the coin on forums, etc.
I wouldn’t call it a strategy but rather a scam. Besides these announcements and other ways for promoting a coin, there’s also a direct pumping.
The whale (a trader will a lot of money) starts buying large volumes of one of the coins that have low trading volume. Let say that the trading volume is 100 Bitcoins per day. The whale comes and starts buying the coin, placing a huge buy wall of, for example 50 Bitcoins.
Since there is not enough liquidity (i.e. not enough people that are willing to sell the coin at that price), whale starts to push the price up with the wall. Other traders are soon aware of the “trending” coin, as it has day-to-day price increase of, let’s say, 50%.
This increase in price attracts other investors looking to make a short-term profit and a lot of beginners and people with not enough knowledge about the coin. That way the demand that was fake slowly turns into reality, as more and more people want to buy the coin.
When the price is high enough, the whale starts selling the large amount of coins he bought earlier. This results in a large profit for the whale, and leaves many small investors in the red. These investors are known as “bag holders” as they keep the cryptocurrency in hope that the price will recover.
You can also check this video to learn more about it:
The scam does work and there are many traders who use it, but I would advise against using it. There are better ways to earn a profit on the trading platforms.