Wall Street was turned inside out last week as retail investors brought video game retailer GameStop (GME) back from the brink of bankruptcy. Now, the movement has veered to the crypto market. But rather than instilling change, this latest movement looks to endanger the nascent market and its investors.
The retail revolution
The GameStop saga has become the stuff of legends; a true underdog tale lauded by the likes of billionaire Elon Musk, venture capitalist Chamath Palihapitiya, and even republican senator Ted Cruz.
It’s a story of retail traders bandying together to pump massively discounted stocks that had been heavily shorted (on no real fundamental basis) by wealthy hedge funds.
For many, countering market manipulation with market manipulation was a necessary evil—comparable, for some, to the legends of Robinhood. But the retail rebellion soon spread to the crypto market, leaving what little justification there was behind.
Crypto pump and dump: Dogecoin and XRP
What started as a Reddit revolution quickly descended into unwarranted collusion. And Dogecoin (DOGE), a Shiba Inu-centric cryptocurrency created as a gag, was the first target.
Despite a deafening lack of development since 2015, the meme-coin pumped by over 800% as rabble-rousers from r/WallStreetBets (the Reddit group that started it all) threw their weight behind DOGE.
However, like any pump built on speculation alone, Dogecoin came quickly crashing down— leaving unsuspecting late-comers holding the bag.
Once DOGE was done, the sentiment (and liquidity) shifted onto the embattled XRP token.
In December the price of XRP fell to a 6-month low after the US securities and exchange commission (SEC) filed a lawsuit against the token’s issuer Ripple. Still, the ongoing litigation wasn’t enough to put speculators off.
WallStreetBets wasn’t alone this time. One self-avowed “pump” group, 200,000 members strong, also led the charge.
After an anticipatory buying spree, XRP rallied almost 75% in a single day. However, traders were soon left nursing 50% losses as the inevitable dump occurred at the precise moment the real pump was scheduled to kick off.
Should I get involved?
With the promise of such easy and quick gains, it’s understandable how traders, particularly newcomers looking to turn a profit, get drawn into such blatant market manipulation tactics. But as the sudden XRP dump illustrated, most of these schemes rely on someone—or in the case of XRP, almost everyone—taking the fall. After all, there are always two sides to every trade.
These pumps operate on the greater fool theory, which dictates that there will always be someone willing to buy higher (i.e., the greater fool). The issue is, with fundamentals thrown out for speculation, there’s no telling when the pump will end and where the dump begins. And, unfortunately, greed knows no bounds.
More often than not, the organisers of these schemes are ahead of the curve and bag huge profits before the pump even begins—as was the case with XRP’s recent action. Sadly, it’s typically newcomers that fall victim to these ploys, ultimately sending a bitter message to every other would-be crypto adopter.
DOGE and XRP weren’t the first pump and dumps, and they certainly won’t be the last. While crypto-appropriate regulation will help curb these schemes, it’s ultimately down to the investor to decide for themselves which crypto they’re willing to place their capital behind.
As with both DOGE and XRP, none of the fundamentals nor the technicals lined up. Recognising key technicals such as liquidity and risk, relative to a portfolio’s overall exposure to an asset, is critical to avoiding risks and Identifying long-term crypto asset value.
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