Pumping and Damping are forms of market manipulation where a sharp price movement of an asset is artificially created to profit at the expense of other market participants. These practices are especially common in unregulated markets, including cryptocurrency exchanges and illiquid securities.
What is Pumping?
Pumping is the artificial inflation of an asset's price. This often occurs through the dissemination of false information, coordinated purchases, or media hype. The goal is to attract the attention of retail investors, provoking mass demand and price growth.
Example:
A group of traders starts to buy up an unknown cryptocurrency en masse, spreading information about an impending 'explosion'. The price rises rapidly, creating the illusion of a trend.
What is Damping?
Damping is a sharp price collapse following a pump phase. When the price peaks and retail investors enter the market, the manipulators begin to sell the asset en masse. This causes a price crash, leaving new market participants with losses.
Consequences:
Losses among unqualified investors
Loss of trust in the market
Possible legal consequences in jurisdictions with financial regulation
Legality and risks
In most countries, such actions are classified as illegal market manipulation. On traditional exchanges, they are strictly curtailed by regulators, but they remain a common practice on cryptocurrency exchanges.
How to protect yourself as an investor
Check information sources
Avoid 'hot tips' from social media and chats
Analyze the asset's liquidity
Use stop-losses and do not invest without proper risk assessment
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