How the Cryptocurrency Pump-and-Dump scams work


Various reports have suggested or provided anonymous reports of schemes to manipulate cryptocurrency trading through pump-and-dump schemes. A recent report by the Wall Street Journal provides definitive proof. The report provides an inner look at pump-and-dump operations. The Journal states that the crypto-pump-and-dump schemes have accounted for $ 825 million in commercial activity over the past six months and "hundreds of millions of dollars in losses". During the period from January until the end of July, there were 125 pump-and-dump operations and they manipulated the prices of 121 different currencies. (See also: How does a pump and drainage scam work?)

How do pump and drain schemes work?

According to the Journal, cryptographic pump-and-dump schemes operate in a fashion that is reminiscent of the early days of the stock market. During that time, a group of traders provoked chaos in the markets by manipulating prices through group buying.

There is a similar dynamic in the cryptocurrency markets. A horde of traders teases enthusiasm for a currency by evangelizing it on multiple channels, including social media. Next, they instigate a coordinated buying frenzy for this. While the price of the currency rises, other traders, not connected to the pump-unloading group, also attack the purchase race, further increasing its price. Coordinated action is repeated, except this time in the sale of the currency, when it reaches a certain price target. This causes a sharp drop in its price. While the pump-and-dump group gains profits, other traders, who have bought the currency on the basis of false promises, remain holding losses. (See also: the former CEO of Paypal calls Bitcoin A Scam).

The preferred means of communication for operators involved in pump-and-dump are the Telegram and Discord messaging apps. Operators form groups on both platforms. These groups charge between $ 50 to $ 250 for membership. In some cases, traders can choose to evangelize service to others and become a member. Binance, an exchange of cryptocurrencies based in Hong Kong, is a favorite for such transactions because it lists small coins with low liquidity that makes them ideal candidates for manipulation.

Not all merchants in the scheme make money, however. The Journal article provides the example of a San Diego trader, Taylor Caudle, who lost $ 5,000 in 30 seconds. He had placed a purchase order for DigixDAO listed on Binance. Its prices have fallen and they have not recovered. According to Caudle, these schemes "encourage the poor followers to continue to buy until the price is reached [target]something that often never happens".

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