Study reveals plethora of messenger-led crypto Pump and Dump schemes

According to a new academic paper, anecdotal tales of a crypto market blighted by manipulation are not far from the mark. According to academics from Universities in New Mexico, Tel Aviv and Tulsa, popular messaging networks Telegram and Discord are home to crypto scammers that have been openly skewing markets in order to inflate the price of their assets before selling them off to unsuspecting fellow traders.

These so called ‘Pump-and-Dump’ schemes have been a common point of discussion among observers of the crypto space for a long time, but now researchers reckon they have proof of 4,818 such schemes being planned between January and July this year alone. The schemes highlighted by the data they have scraped encrypted messaging apps Telegram and Discord, both popular with traders of crypto, include attempts to effect the price of Bitcoin. Telegram – itself the subject of a massive private pre-ICO funding round this year – was the most used, hosting 3,767 of the so-called “Pump signals”, while Discord relayed the other 1,051.

According to Bloomberg, the draft of the report calls the scale of fraud “widespread and often quite profitable,” and of such prevalence that it should “raise concern” among regulators. The paper’s abstract starkly says that “The surge of interest in cryptocurrencies has been accompanied by a proliferation of fraud,” and that, while Pump and Dump is an 100-year-old ruse,  “the recent explosion of nearly 2,000 cryptocurrencies in a largely unregulated environment has greatly expanded the scope for abuse.”

The paper, named The Economics of Cryptocurrency Pump and Dump Schemes then seeks to highlight the mechanics of the operation and quantify what makes a successful scheme by seeking a correlation between the signal found in messaging and a significant percentage move in the price of asset in question.

The paper describes the process of a pump in three phases:

A signal to buy is transmitted to insiders via one of the messaging apps.

The process of buying begins to move the price upwards, due to the fact that “many of the nearly 2,000 cryptocurrencies available today are illiquid and are characterised by very low trading volumes on most days, with occasional volume and price spikes.”

If the insiders succeed in raising the price and attracting interest from buyers outside of the circle, the pumpers then sell their positions at the inflated price.

Looking deeper into the report, its creators have even managed to quantify their level of success.  As you would perhaps expect, it appears that pumping coins with a lower market capitalisation is the most profitable course of action as larger moves in price can be created with concerted effort, and profit maximised.

The raw data underpinning the report tells that story for itself. Coins ranked in the Top 75 by Market Capitalisation were subject to 348 pump signals on Discord and 1,000 pump signals via Telegram. The median price increases of those coins corresponding to those pronouncements was 3.51% and 4.81% respectively.

By contrast, Discord users gave out less signals related to coins ranked below 500 by Market Cap, but bought in a Median Price Increase of 23.23%. 1,058 similar signals went out on 500+ ranked coins on Telegram, with a Median increase of 18.74%.

The report concludes that this success is directly attributable to the fact that “coins with lower market capitalization typically have lower average volume,” and that “lower average volume gives the pump scheme a greater likelihood of success.”

Also, the fewer the number of exchanges on which the coin can be traded, the better the level of success.

“This makes intuitive sense,” they say, “because with fewer exchanges, pump schemes have better control over the total volume of the coin.”

Such price manipulation, as we have reported in the past, has been a significant factor in the SEC’s decision making process regarding the many proposed Bitcoin ETFs that it has rejected during the course of 2018. As the researchers point out, these results – especially that they include Bitcoin as well as ‘lesser’ altcoins – “have implications for regulatory policy.”

Its conclusions, then, echo the sentiment experessed by many crypto traders that “Regulators should be very concerned that price manipulation via pump and dump schemes is so widespread.”