Schemes of manipulation of the cryptocurrency could be found and foiled by the new algorithm

Imperial scientists have created an algorithm to predict when specific criptodines are at risk of pump-and-dump schemes.

The algorithm could help market regulators predict and prevent cryptocurrency schemes that view traders spending seven million US dollars per month, only to find that the price of their purchased currency decreases with the explanation of the scheme.

Pump-and-dump schemes are used to artificially inflate the price of a cryptocurrency – types of virtual currency – so that the scheme organizers can sell the currency at a profit. However, the scheme works by bringing hundreds or thousands of investors together to increase or "pump" the price – some of which do not act fast enough when the price peaks, and therefore lose money.

Used for a long time by traditional financial markets, pump-and-dump systems are now also common in encrypted financial markets. Pump-and-dump system organizers often leverage their knowledge to derive pump-and-dump from their pumping colleagues and the practice costs the cryptocurrency market seven million dollars a month. Deceived by the scheme, many investors rush into the purchase of some coins and lose money.

Now, for the first time, researchers at Imperial College London have studied pump-and-dump patterns as they happen and developed an automatic learning algorithm that could help market regulators predict and prevent this type manipulation of the market. An initial draft of the document is published on arXiv.

Market manipulators

The pump-and-dump scheme organizers promote a specific cryptocurrency, in crypto-exchanges like Binance or Yobit, to a group of people who come together to buy it at the same time. The destination cryptocurrency is often a relatively unknown token, such as EZToken or Tajcoin.

The increase in demand causes the value of the currency to rise rapidly. Even if markets fluctuate naturally, deliberately manipulating a currency to increase in value is known as "pumping".

When the currency has increased, initial buyers quickly sell their currencies and the value drops sharply, known as the "dumping" stage. At this point, the value of the currency has often fallen far below what many users have bought for them, meaning they lose money.

The main author of the document Dr. Jiahua Xu, from the Department of Computing of Imperial, said: "The organizers of these schemes, which control the process and are at the head of the curve, can make big profits, while users less experts often fall behind the curve and lose money. "

Pump discharge

Pump organizers use anonymous messaging apps to organize pump-and-dump schemes. They also publish in public forums such as Reddit or Bitcointalk to attract participants.

In their study, the researchers tracked the message history of over 300 Telegram groups from July to November 2018 and identified 220 pump-and-dump events orchestrated through these groups.

The researchers found that about 100 pumping and landfill groups in Telegram organize two pumps a day on average, ultimately encouraging investors to spend seven million dollars a month.

They then looked for signs to identify which currency, if any, was about to be pumped by analyzing the characteristics of the currencies as valuations and market movements. The signs included the capitalization of the currency market and the unusual fluctuations in price and volume before the pump

Based on these signals, the researchers developed an algorithm that predicts with good accuracy the probability that a given coin will be pumped before it happens.

Researchers say their algorithm and subsequent trading strategy suggestions could be used by regulators to curb pump-and-dump schemes.

They added that although these schemes can not be technically illegal, they are not ethical and harmful to users of cryptocurrency and markets in general. Co-author Dr. Ben Livshits, also from Imperial's Computer Science Department, said: "At the moment, regulators like the Commodity Futures Trading Commission can only alert users of the financial risk inherent in the systems and offer advantages. to potential whistleblowers Our algorithm could help them proactively prevent pumping and dumping. "

Dr. Xu said: "As buyers who fall victim to these schemes, market regulators often fall behind the pumping and dumping curve and our paper suggests a cheap and relatively easy way to tackle the problem.

Next, researchers will consider measuring how much money investors can lose in programs. Dr. Xu added: "In the present study, we measured only the total amount of money involved in trading. Our next task would be to measure the financial losses for individual users."

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Imperial College of London