Crypto Pumps and Dumps: What Are They and How to Profit?
The anomalous price spikes and drops are not uncommon across crypto exchanges, driven by various factors. While some see an opportunity to profit, others risk losses. Let’s delve into how to navigate these trends beneficially.
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Occasionally, you'll spot headlines in the crypto world like, ‘Bitcoin surges to $150,000 on a random exchange!' While these occurrences are rare and prices typically stabilize shortly after, they do spark an intriguing question: What triggers these sudden surges, and how can one capitalize on them?
Examples of Unusual Coin Fluctuations
Unlike the typical Pump & Dump scheme where an asset's price shifts across all exchanges simultaneously, these particular fluctuations occur solely on a specific platform. After such an uptick, the price usually stabilizes.
For instance, on February 15, 2022, the MOVR (Moonriver) coin on Huobi spiked to $900, while on other platforms, its price didn't exceed $100. This surge was initially triggered by favorable news about the asset. Yet, the heightened spike on Huobi resulted from restricted arbitrage opportunities. Huobi temporarily suspended MOVR deposits, leaving holders unable to sell their coins. This disruption between buyers and sellers meant the asset was priced considerably above the market rate for several hours.
Abnormal pump of MOVR coin on Huobi. Source: Huobi.com
Another instance involves the ARB coin paired with TUSD on Binance. Given the trading pair's limited liquidity, the Arbitrum price briefly dipped to $0.35 before quickly rebounding to over $1 in a few moments.
Abnormal ARB price drop due to liquidity shortage. Source: Binance.com
Reasons Behind Abnormal Crypto Pumps and Dumps
Primarily, unusual price shifts often stem from technical shortcomings on a specific trading platform:
- When there's a lack of liquidity in a trading pair, a user's market order might absorb a large number of limit orders, dramatically altering the asset's price.
- Inefficient market makers failing to stabilize a coin's market price.
- Suspensions on token deposits or withdrawals can artificially skew the supply or demand dynamics on the exchange.
- Simple human error: Traders might not have fully assessed the trading landscape on the platform.
Sometimes, these market anomalies can be intentional maneuvers by market makers, although these instances are exceptionally rare.
How to Profit from Market Anomalies
Given that most anomalies result from liquidity issues, an astute trader can strategically set a limit order to either buy or sell an asset at a significantly deviated rate from the ongoing market price. When an anomaly occurs, this order could be fulfilled, and the asset's price usually reverts to its average range promptly.
It's virtually impossible to pinpoint where and when such an anomaly will take place. However, a couple of general trends might offer some insights.
First, significant price fluctuations tend to align with periods of intense market volatility, often due to major economic revelations—like announcements regarding inflation rates, central bank interest rates, or significant updates about a particular cryptocurrency.
Second, it's observed that these anomalies are more prevalent on lesser-known exchanges or with lesser-traded stablecoins (e.g., USDP, TUSD). These coins inherently possess lower liquidity compared to heavyweights like USDT and USDC, hence attracting fewer trading activities.
Who Suffers During Unusual Price Fluctuations?
In most scenarios, individual traders are most affected by unexpected price spikes or drops. When making transactions at market rates, and due to an inadequate number of orders in the order book, the transaction's average price may end up being detrimental. This can lead traders to inadvertently sell at a low or purchase at a premium.
To navigate such pitfalls, consider these strategies:
- Consistently monitor the order book for adequate liquidity.
- Trade primarily in pairs with high liquidity.
- Use limit orders for transactions.
- Steer clear of dubious or lesser-known cryptocurrency exchanges.
- When using decentralized exchanges, maintain a low slippage rate, ideally below 5%.
These simple practices can help shield you from unpredictable cryptocurrency price shifts and reduce potential losses.
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