REPORT: PUMP AND DUMP SCHEMES IN CRYPTO REALM

A new study on pump and dump schemes in the crypto space has been published by universities in Israel and the United States with the title “The Econocmics of Cryptocurrency Pump and Dump Schemes“. The authors goal was to describe how this old securities manipulation scheme works in the cryptocurrency realm. It was already the second academic work on this subject. Again, the paper condluded that

  • crypto pump and dump is a wide spread disease and
  • Telegram as well as Discord are the new boiler rooms


The Methodology

For the purpose of their pump and dump paper, the authors collected and analyzed comprehensive data (download the study here). On the one hand, the authors collected price data on nearly 2,000 coins and tokens across 220 exchanges as reported to coinmarketcap.com. On the other hand, they systematically searched for pump signals on Telegram and Discord using their respective APIs. Finally, the study matched the pump signals on Telegram and Discord with the trading data provided by CoinmarketCap.

Regulators Should be Worried

Pump signals are announcements to motivate and coordinate people to buy a cryptocurrency at a given time and then take advantage of the price jump. Pump and dump schemes were prohibited already in the 1930s in the US and qualified as securities fraud. Nevertheless, the practice has continued especially in the penny stocks segment. Cryptos in combination with social media gave these schemes a huge push and provided for the establishment of a highly efficient as well as globally working “business model”. In their data collection process, the study identified 1,051 pump and dump schemes on Discord and another 3,767 on Telegram. They took place during a six month period from mid-January 2018 to early July. The authors claim that their comprehensive data provide the first measure of the scope of pump and dump schemes involving cryptocurrencies. The scope should raise “red flags” for regulators, especially as mainstream financial institutions begin investing in cryptocurrencies.

The Success Story

The study attempted to measure the “success” of those illicit schemes which was defined to be the percentage increase in the crypto price following a pump. Ten percent of the pumps on Telegram and Discord pushed the price by more than 18 percent or 12 percent respectively in just five minutes. The authors point out that the January-July 2018 period was a period in which cryptocurrency prices and trading volumes were falling significantly and thus a just “moderate” percentage increase has to be regarded as a success of the pump.

The most important factor for the success of a pump is the ranking of the coin. Typically, coins and tokens with lower market capitalization have lower average trading volumes which give the pump schemes a greater likelihood of success. Pumps with obscure coins with low market capitalization were much more profitable than pumps with the big cryptos in the ecosystem. While the median price increase was 3.5% (4.8%) for pumps on Discord (Telegram) with the top 75 coins it was 23% (19%) for coins ranked beyond the top 500. 

Conclusions

Again, this paper provides evidence on the widespread manipulation of crypto markets supporting the view of the U.S. Securities and Exchanges Commission (SEC). Over the last couple of months, the SEC refused to approve crypto-based Exchange Traded Funds (ETF). The agency did so because it found that crypto markets are prone to manipulation and fraud. Obviously, the SEC has been confirmed again by this study.

Moreover, the combination of cryptocurrencies and social media channels potentially give rise to globally orchestrated securities fraud with pump and dump schemes. The blockchain-technology obviously provide the perfect clearing and payment technology for such cybercriminal ventures.