4,818 Pump-and-Dump Schemes Identified, Involving Over 300 Cryptocurrencies

You may hear about pump-and-dumps dozens of times every day in the crypto-sphere on popular forums, social media, and messaging apps. Every price spike followed by a downfall is automatically labeled as a pump and dump — yet, most aren’t. The real schemes happen behind the curtains, on private servers on Discord, or on private channels on Telegram, where tens, if not hundreds, of thousands of participants join forces to fraud the naive trader. Unfortunately, such groups and such schemes are widespread in the cryptocurrency market — as seven economists and computer scientists found out after a six-month study. They researched the real pump-and-dump market from mid-January to early July 2018. Essentially, they scanned all major groups from Telegram and Discord promoting such schemes and collected pump signals (3,767 on Telegram, plus another 1,051 on Discord).

A new paper from 7 American and Israeli economists identified 4818 pump and dump schemes involving 300 different cryptocurrencies during one 6 month period. The economists found that the schemes were "widespread" and "often quite profitable." https://t.co/SPRG6uXCFn

— Nathaniel Popper (@nathanielpopper) December 18, 2018

Afterward, the researchers looked at the price chart and collected over 316 million price data points on a five-minute interval. They compared the data points with the signals and came up with some interesting — and, for some, profitable — conclusions.

Obscure, Illiquid Cryptocurrencies are the Major Hit

The study shows that cryptocurrencies ranked 500 and below, according to CoinMarketCap metrics, are the most profitable. On Telegram, 176 such coins were involved in 1,083 pump signals, with the price increasing almost 19 percent on average. On Discord, 158 pump signals included 80 coins ranked 500 and below; the price increase was over 23 percent. The success of the pump-and-dump schemes was also determined by the number of exchange listings. The fewer exchanges a cryptocurrency was listed on, the more successful the pump and dump. In other words, if the coin was illiquid and had an insignificant daily trading volume, the schemers could easily manipulate the price without investing much. Furthermore, if a coin was listed on just a few cryptocurrency exchanges, the pumpers and dumpers could control the price manipulation much more easily. As for the major cryptocurrencies in the top 75, there were many attempts to pump and dump, but at a less successful rate. On Discord, for example, many of the pump signals involved the top 75 coins (348), but the price increase was just 3.5 percent. On Telegram, the seven economists and computer scientists recognized 1,000 pump signals for 56 of the top 75 coins on CoinMarketCap. The price increase was under 5 percent on average.

The More The Merrier

The paper also mentions the direct correlation between the pump-and-dump group size and the rate of success. The larger the Telegram channel or the Discord server, the more pressure on the price that group exerts — especially if the targeted coin is illiquid and listed on just a few cryptocurrency exchanges. Unfortunately, there are 50K+ pump and dump groups, with some bragging of having over 300,000 unique members and tens of thousands of active members. Such groups are actively promoting their schemes via professional websites and catchy online ads. There is even an Android app aggregating all these groups and their pump signals. With such schemes running rampant, many small investors will avoid entering the market. Moreover, regulators like the SEC will continue to delay licensing any Bitcoin-based ETF, even though Telegram and Discord groups cannot really influence Bitcoin. The only way to stop such frauds is to avoid these groups, first and foremost, and educate others to do so. Remember, they may seem profitable, but this is just a mirage. Only the top of the ‘food chain’ — the admins of the groups and the big whales — can really profit. In time, as more and more liquidity is injected into the market, the pump and dumps will become less effective and these groups will slowly disappear. Ultimately, adoption will cleanse the market from such schemes. Have you ever joined a pump-and-dump group before? How did you find the experience? What view do you have on the pump-and-dump schemes? Please share your thoughts with the rest of us in the comment section below.