Have you ever encountered a situation where the price of a coin suddenly skyrockets within a few hours and then crashes rapidly? That is exactly the pump and dump phenomenon I am about to share with you. It is one of the most common market manipulation strategies in the current crypto space.

The operation of pump and dump is quite simple. Large investors, also known as whales, will accumulate a large amount of coins when the price is low. Then they create noise on forums and social media to stimulate FOMO among new investors. When enough people buy in, the price reaches a record high, and bam, they sell everything off and make huge profits. Late buyers become victims, forced to cut losses.

I remember a clear case with Tierion (TNT) in 2020. Its price rose from $0.05 to $0.11 in a short time, but just 10 days later it plummeted to $0.03. No special news, just positive rumors circulating online. That’s a classic pump and dump.

Why does pump and dump happen so frequently? Partly because the crypto market still lacks strict legal regulations, unlike traditional stock markets. Additionally, herd mentality is very easily triggered, especially when prices surge sharply. People fear missing out on opportunities, so they buy hastily without thorough research.

Recognizing pump and dump isn’t too difficult. If you see a small-cap coin suddenly surge in price within a few days, or is suddenly mentioned by celebrities, be cautious. Check if there’s any real information about the project, or if it’s just empty promises.

To protect yourself from pump and dump traps, you need to do a few basic things. First, always research thoroughly before investing. Learn about the team, the project, and real partners. Second, don’t let herd mentality influence your decisions. There are thousands of other coins; you don’t have to chase the hot ones. Third, manage risks tightly by clearly defining your capital allocation and stop-loss points. Finally, prioritize investing in larger coins with high market capitalization and long-standing operational history.

Overall, understanding the mechanism of pump and dump will help you avoid costly mistakes. The crypto market is full of opportunities but also full of risks, so always be cautious and smart in every trading decision.