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The Social Science Research Network (SSRN) recently published research into the phenomenon of pump-and-dump groups within the crypto community. The paper – conducted by seven academics from Tel Aviv University, concluded that "regulators should be very concerned that price manipulation via pump and dump schemes is so widespread."
What is a pump-and-dump scheme?
A pump-and-dump scheme is a type of price manipulation where a group of traders aims to drive an asset's price up through coordinated buying. Once outside investors notice the surge in price, the insider group starts selling the positions they were acquired at lower prices, thus making a profit.
It is important to stress that pump-and-dump schemes are illegal and considered securities fraud by the United States Seсcurities and Exchange Commission (SEC).
SSRN study: Pump-and-dumps are 'widespread' on Telegram and Discord
The SSRN study focused on the scope of pump-and-dumps schemes involving cryptocurrencies. During their research, the academics established that these groups are usually organized through two popular apps within the crypto community: Telegram and Discord. "These papers are the main outlets for pump and dump schemes," the paper argues.
Specifically, after collecting "the researchers located 1,051 and 3,767 pump-and-dumps schemes on Discord and Telegram respectively, from mid-January 2018 to early July 2018.
Pumping and dump channels, the paper notes: "obvious pumps," "target pumps" and "copied pumps."
The first category openly used the words "pump" and "dump," and most of all, was "straightforward to identify." researchers argue. Then, more updates about the time and place (i.e., the crypto exchange where the pump would occur) would follow. The name of the coin was posted right before the pump. Moreover, most of those channels allegedly had "premium membership plans," which could be purchased or earned through recruiting new members.
Target pump channels, in turn, "were not as brazen as the first category," albeit they allegedly had many more signals. These are not necessarily the same as "pump" and "dump," as their members "were reportedly posted on the website. as well. Unlike the first type of group, these channels "typically did not have a premium membership option".
Finally, there were copied pumps from the other sources. They were mainly avoided by the researchers, but they were not meant to "ensure complete coverage, i.e., to find the
pump sources and follow them. "
After identifying these schemes, the study measured their results, defined as the percentage increase in the price following a pump. On Telegram and Discord, 10 percent of the Pumps increased the price by more than 18 percent and 12 percent respectively in just five minutes. An event for the pump. "
Moreover, using the tops of the coins: "The average price increase was 3.5% (4.8%) for pumps on Discord (Telegram) using the top 75 coins ; it was 23% (19%) on Discord (Telegram) for coins ranked over 500. "
Interestingly, Bitcoin (BTC) – traditionally the most dominant asset on the market – was not immune to pump-and-dump schemes. BTC on Discord and Telegram during the period analyzed. However, those pumps accounted for only 1.7 percent of all actions, and their extent was unspecified in the paper.
"The proliferation of cryptocurrencies and changes in technology have made it relatively easy
(and virtually costless) for individuals to coordinate and conduct pump and dump schemes, "the academics argue.
Further, they conclude that the scope of pump-and-dump schemes within the crypto community should raise red flags for regulators, "especially as mainstream financial institutions
begin investing in cryptocurrencies. "Indeed, they cite" the regulatory vacuum "as one of the potential reasons why some of those groups are operating openly:
"With the exception of insuring [sic] has been paid on cryptocurrency profits, US regulatory policy towards cryptocurrencies and initial coin offerings (ICOs) has been [sic] generally been "hands-off." One problem in moving forward in the regulatory sphere is that – unlike stocks, commodities, or fiat currencies – cryptocurrencies do not have a regulatory agency in charge of the cryptocurrency policy. "
Imperial College London study: Pump-and-dump schemes account for $ 7 million worth of trading volume per month
Jiahua Xu and Benjamin Livshits of Imperial College London, the paper was published in late November.
Volume per month, which is about 0.049 percent of total 24-hour trade volume.
Xu and Livshits investigated 237 pump-and-dump between July 21 and Nov. 18, including the Telegram channel "Official McAfee Pump Signals," which allegedly pumped the BVB coin at the time. The researchers concluded:
"The study reveals that the pump and the dump can easily use their insider information to take extra gain at the sacrifice of fellow pumpers."
Moreover, Xu and Livshits appealed to the historical pump-and-dump systems to train a machine learning algorithm that attempts to identify frauds before they occur.
Regulatory measures: CFTC's warning and whistleblowing program, congressional bills on the way
Price manipulation represents a major concern for regulators. While it seems to be much less common in regulated, fully compliant markets, the crypto market remains to be largely unregulated territory, where insider trading is arguably easier to perform. However, the regulators have started to take notice.
On Feb.15 of this year, the Commodities Futures Trading Commision (CTFC) released its first Pump-and-Dump Virtual Currency Customer Protection Advisory statement:
"Customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly believable information in an attempt to deceive. "
An online chat room coordinating a pump-and-dump scheme to provide an example:
"15 mins left before the pump! Get ready to buy. "" Five minutes till pump, next message will be the coin! Tweet to us and send the link to telegram (sic) for outsiders to see what we are pumping so they can get in the action too !! lets (sic) take it to the MOON !!!!! "
CFTC also rolled out at 10-30 percent bounty for pump-and-dump whistleblowers who are able to lead the CTFC to monetary sanctions of $ 1 million or more in the crypto market specifically.
Moreover, in November 2018, two bipartisan bills focusing on cryptocurrency market manipulation that aim to "the United States to be a leader in the cryptocurrency industry" were compiled by congressmen Darren Soto and Ted Budd. The press release cites the New York attorney general 's report on virtual exchanges' risk of manipulation and the Wall Street Journal article on bots allegedly manipulating the price of Bitcoin as reasons for concern.
Dubbed "The Virtual Currency Consumer Protection Act of 2018" and "The U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018, "the bills will be reviewed by the House of Representatives.
"The Virtual Currency Consumer Protection Act of 2018" urges the CFTC to study price manipulation in virtual markets and then to make recommendations for regulatory changes that could improve their monitoring procedures.
The second bill, in turn, advocates a "comparative study of the regulation of virtual currency in other countries" in order to "make recommendations for regulatory changes to promote competitiveness."
As regulators seem to be more than a straightforward action, some crypto market participants have started to deal with the issue of price manipulation with the help from mainstream players. Thus, in November, Nasdaq – the world's second largest stock exchange – announced that its market surveillance technology could "print out manipulation" in crypto markets, including pump-and-dump schemes in particular. The exchange's first crypto client who adopted its surveillance system is Gemini, the compliance-oriented U.S. crypto exchange owned by the Winklevoss twins.
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