If you are new to crypto, you might be wondering what these terms actually mean.
They are being used in trading signals, social media posts, articles and even on mainstream media lately, so let’s bring some clarity.
Let’s start with what do we mean by Volatility:
You’ve surely heard it many times: that cryptocurrencies are very volatile.
This refers to instability in their prices.
Cryptocurrencies can experience significant price variations in short periods of time. On many occasions their value can change by 100%-200% and even more than 400% in a single day (with the exception of stable coins of course), but this is also the appeal of this new asset class to investors and especially the speculators who trade them on exchanges.
A sudden increase of the price of significant levels is known as a “pump” – it can be a result of advancements and development of the tech of a coin or a major event (such as a big exchange listing or change in the protocol, halving, a hard fork and so on) which brings a lot of attention from buyers who rush into a buying frenzy but it can also be a coordinated effort to increase the price artificially, for purely speculative purpose. During a “pump“, digital assets can jump in value exponentially, by a few hundred percent in a single day or even in hours. The faster this process occurs, the more it signals for manipulation and in such cases it is often followed by a sudden drop, a process that can occur even faster and is known as a “dump” – this is when the selling pressure overpowers the buyers and supply becomes disproportionate to the demand, crashing the prices to the previous lows or even worse.
The two events are often interlinked and this is what we call a Pump and Dump (P&D) and in fact most of the pump’n’dumps in crypto are result of coordinated efforts by groups of individuals with malicious purpose of falsely inflating prices of a coin for personal gains. This is a practice that is illegal in traditional stock markets but still largely popular in the crypto space.
Such is the case with the Flash Pump and Dump.
This happens ultra-fast and lasts a very short period – typically within a few minutes and is organised by pump and dump groups that thrive on Telegram, Slack and other online channels. These are groups of traders who invest heavily in a cryptocurrency at a very low price and then publicise it aggressively, often using misleading or outright false statements to get other investors interested and to drive the price upward. Once that happens, the group sell off their coins in bulk which results in a profit for them, but it creates a huge drop in the coin’s value due to other traders panicking about the falling prices and selling off their positions as fast as they can. We call this a ripple effect as it catches on really quickly and creates the huge “dump“. After this event the price usually retracts to previous lows or even below, and creates many bagholders.
Bagholder is a term describing an investor who holds large amounts of a coin that has decreased in value so much, it has become worthless. It is often used for those who bought during high peaks in value but held-on to their coins for too long, resulting in losses when the currency came crumbling down.
Eventually they might give up on their hope for recovery of their investment and capitulate.
To sell-off one’s assets (crypto holdings) at a loss. This could also be a period of strong selling activity, where investors give up their positions and sell-off their holdings and we talk of a capitulation period or phase on the market. It can also be referred to as panic selling because during a period of capitulation, sell orders peak at a much higher-than-average level, which quickly drives the asset price lower and lower in a frantic manner.
Capitulation can be described as the moment when investors lose hope – accepting losses and giving up on their previous gains. When the panic-selling period is over, marking the end of the capitulation, it may be followed by either a consolidating period (sideways price movements) or even by an upward trend that would potentially indicate the beginning of another bull market.
Markets go in cycles and it is not unusual for coins to loose up to 90% of their value during the period of a bear market and gain it all back again during the next bull market.
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