Understand Steem (the crypto-currency) and don’t get burned

For those who are completely new to crypto-currencies or just trading in general.

Today we saw the price of Steem jump 40%, which is great when it’s going up… but people panic when it’s going down.

If you have never traded it may be hard to understand why.

Steem is the crypto-currency that is designed to transfer value between Steam Dollars, Steem Power and regular currencies. So let’s face it, at one time or another you will have some Steem therefore it is worthwhile trying to understand it.

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If you think you like a bit of RISK:
Understand the risks you are opening yourself up to.

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The 40% rise we saw today was probably caused by one buyer. The amount of Steem that was purchased was only about 7 000 USD. Which is virtually nothing when it comes to markets, so how could 7 000 USD change the price by 40%?

The answer is very simple:

There isn’t much Steem available on the markets. Much of it is locked up in its long term form, Steem Power. Because there is so little available it is possible for relatively small purchases to raise the price significantly. The same is true for small sells, they can also drop the price rapidly in similar ways.

When this occurs with a currency or stock it is considered not very liquid.

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WARNING:
This will make the Steem crypto-currency highly susceptible to market manipulations similar to what happens to penny stocks and other low liquidity crypto-currencies.

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Two of the most popular scams are described below:

The Pump and Dump scheme:

• Miners amass, or traders buy large amounts of a thinly traded crypto-currency at low prices.
• Then the hype starts or they buy up rapidly causing the share prices to jump 10% to as much as 50%, maybe more.
• Naive investors see all the positive hyped up marketing news about the currency, and they see the recent trade activity and increasing price and volume. This makes many investors feel excited about the stock and many start to suffer from FOMO (fear of missing out).
• Such naïve traders then buy the currency hoping to rake in the profits.
• The huge buying activity of the thinly traded stock by traders causes the currency to skyrocket in price well above the already inflated prices. The share prices skyrocket because not enough sellers are available to meet present buy orders at current prices.
• Such huge new buying activity creates liquidity for the schemers to now sell shares at the inflated prices. The liquidity is created by the high trading volume (trade activity), increased buying activity and increased market cap.
• The law of supply and demand is alive and well in that many buyers are available to buy up shares that schemers are now dumping/selling to hopefully make a huge profit.
• The ascent in stock prices inevitably begins to slow and waver.
• At some point the schemers may dump the remaining currency they owned which temporarily or permanently causes the prices to plummet as low, or near as low, as the levels it was before the pump began.
• Those who bought in at inflated prices panic sell at huge losses or are left holding the bag.

The Dump and Pump:

• The Dump and Pump is a similar scam to the Pump and Dump.

• In this type scam, the schemer demotes, rather than promotes, a currency by spreading FUD (fear, uncertainty and doubt).

• They may also initiate selling to induce panic selling. The objective of this scheme is to drop the price substantially to enable the repurchase of positions at much lower prices and selling shortly thereafter when the price rebounds.
• Once again the novice trader not understanding what is going on is induced to panic and may suffer heavy losses

(Somewhat adapted for crypto-currencies from http://www.extraordinaryinvestor.com/penny-stock-scam.html)

If you decide to trade in Steem be aware of the volatility potential and these and other manipulations that are likely to occur. Don’t be suckered.

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If you don’t like risk:

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Then you need to convert your Steem to something else quickly:
Cash out by selling your Steem on an exchange (potentially losing out like selling you Apple or Microsoft shares early)
Power it up to Steem Power (this will lock it up as a long term investment into Steemit.com that will increase your voting power and earns more Steem Power over time)
Convert to Steem Dollars (these are pegged to the US Dollar as a protection against the above described volatility)