Pump-And-Dump Schemes Pervasive In Cryptocurrency: Scholars Report

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A new paper by three university scholars on pump-and-dump schemes (P&Ds) suggests that these events are pervasive in the cryptocurrency industry.

The scholars, Tao Li and Dongwa Shin from the University of Florida and Baolin Wang from Princeton- say that despite regulatory scrutiny, market manipulation within the crypto space is still ongoing.

Their analysis of hundreds of pump and dump events conclude that the P&Ds “are detrimental” and often have “dramatic short-term impacts on the prices and volumes” of the pumped tokens.

Even though some exchanges like Bittrex are said to have banned price manipulation schemes in 2017, the scholars content that individuals or groups have continued to target tokens on this and other leading exchanges like Binance, HitBTC, and Cryptopia among others.

The paper comes out hot on the heels of an insidious YoBit pump-and-dump announcement that left many within the cryptocurrency community dismayed and wondering how an exchange can openly decide to pump random coins on its platform.

What is a Pump-And-Dump Scheme?

Pump-and-dump schemes permeate almost every sector of trading, thus are not limited to cryptocurrency only.

A pump occurs when an entity gives a stock or token a great deal of value or hypes it with the intention of spiking interest and therefore price. Once the “pump” part has succeeded in driving the target asset price into the roof, the “dump” part begins.

The schemers then sell off their holdings to unsuspecting buyers who believe they are buying into a ‘solid’ asset. The dumping leads the prices to plummet, leaving unfortunate buyers nursing loses.

Although authorities like the U.S Securities and Exchanges Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have previously warned and advised the public against crypto scams and manipulation schemes, the practice will remain as long as trading decisions remain a personal matter.

It is hard to regulate P&D schemes, especially as there might be no hard facts for authorities to take follow up action.

The scholarly paper notes that one of the reasons that make it difficult for regulators relates to the fact that most digital assets or tokens trade on “multiple exchanges globally.” This scenario “could lead to regulatory arbitrage.”

It also says that the use of encrypted messaging apps like Telegram could also be helping pump-and-dump schemers to conceal their identity.

P&Ds in the cryptocurrency sector

There is no doubt that pump-and-dump schemes are prevalent in the crypto industry, though there is no central database of how many such events have occurred.

Investing in crypto assets has always been said to be a high-risk venture. Therefore, trading in such instruments has meant that traders (as opposed to hodlers), do have one objective in mind: buy low and sell high.

However, that isn’t always the case, and many get caught up within the hype cycle and fall prey to numerous pump schemes.

Simply put, trading crypto in the middle of a pump-and-dump conspiracy can be the worst experience for anyone. There is a whole spectrum of losers here, but those who get in at the height of a pump or the one who sells last lose the most.

Most pump and dump announcements occur on message boards like Reddit, Bitcoin Talk and via Telegram.

The authors note that:

“In the cryptocurrency market, manipulators often organize “pump groups” using encrypted messaging apps such as Telegram. They create Telegram channels and invite other investors to join. They frequently advertise on social media platforms to attract investors.”

Between May 2017 and August 2018, Tao Li and colleagues claim to have identified a total of 3,412 announcements of upcoming price pumps. Of that number, 1,747 were unique and 1,040 targeted coins on popular exchanges Binance, Bittrex, and Yobit.

Most manipulative schemes target new tokens or ICO offerings that suffer illiquidity. However, a few of the price pumps focused on”better” coins, and the research paper narrowed down to 500 distinct P&D events that involved 239 tokens.

Pump-and-dump experts have also utilized insider or leaked information to dupe trading bots, leading to increased hype around a coin.

“Such leakages are likely driven by VIP members of pump groups who tend to receive signals in advance, or by pump group operators who may trade directly, or both.”

Any end to P&Ds in sight?

It is unlikely that pump and dump activities will end; not as much as there is trading going on and the principle of demand and supply persists.

As such, scrutiny and investor awareness will only be beneficial to the market once specific actions are taken. A good example is Bittrex. Its decision to ban pump and dump events reduced P&D pervasiveness on the exchange.

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