You're right, Bitcoin is the home of fraud, scams, pumps and landfills


That the wild west of Bitcoin and cryptocurrencies is prone to fraud and scams means to underestimate things. Here we have the first academic tests of how frequent pump and deposit scams are. Rather, in reality, as we would expect in a completely unregulated financial market. The next interesting question to ask is if it's worth it – the markets would not exist at all if they had to eliminate the regulation's obstacle at the beginning:

Scheme economics of cryptocurrency pumps and landfills
JT Hamrick, Farhang Rouhi, Arghya Mukherjee, Amir Feder, Neil Gandal, Tyler Moore, Marie Vasek 09 January 2019

The wave of interest in cryptocurrencies has been accompanied by a proliferation of fraud, largely in the form of pump and landfill schemes. This column provides the first measure of the scope of application of such schemes on cryptocurrencies. The results suggest that the phenomenon is widespread and often quite profitable and underlines the need for concerted efforts by industry and regulators to combat the manipulation of cryptocurrency prices.

Bitcoin digital currency (BTC) was introduced in 2009. Bitcoin and many other digital currencies are mainly online currencies. The main currencies are those based primarily on cryptography. Bitcoin is the main cryptocurrency, but there are another 2000.

Bitcoin has experienced a dramatic increase in popularity since its introduction. Its success has inspired dozens of competing cryptocurrencies that follow a similar design. Bitcoin and most other cryptocurrencies do not require a central authority to validate and settle transactions. Instead, they use cryptography (and an internal incentive system) to control transactions and manage the offer. A decentralized network validates the transactions. Once confirmed, all transactions are stored digitally and recorded in a public "blockchain", which can be thought of as a distributed accounting system.

The proliferation of cryptocurrencies and technological changes have made it easier to conduct "pump and dump" schemes. Many of the cryptocurrencies available today are illiquid and are characterized by very low trading volumes on most days, with occasional peaks in volume and price.

Cryptocurrencies have only recently become the subject of research in economics, but the topic has been of interest for a long time in computer science (for the early work on incentives for computer scientists, see Babaioff et al., 2012 and Eyal and Sirer. 2014). Numerous researchers have conducted studies to document and combat threats such as Ponzi schemes, money laundering, mining botnets and theft of cryptocurrencies. Ron and Shamir (2013) attempt to identify suspicious business by constructing a chart of bitcoin transactions found in the public ledger.

In the case of economic research, Gandal et al. (2018), showed that the first time Bitcoin reached an exchange rate above $ 1,000, the meteorological increase was probably caused by fraud in the form of fraudulent trading activity. Griffin and Shams (2018) found that the tether, a digital cryptocurrency that is anchored to the US dollar, probably led to a significant fraction of the price increase of bitcoin and other cryptocurrencies during the rapid increase in cryptocurrency assessments in 2017.

In our recent work on cryptovalute and dump pump schemes (Hamrick et al., 2018), we quantify the scope of these schemes on Discord and Telegram, two widely used group messaging platforms with 130 million users and 200 millions of users, respectively. Both platforms are able to manage large groups with thousands of users and represent the most popular outlets for pump and dump schemes involving cryptocurrencies.

Technologies such as Telegram and Discord allow people to easily coordinate such schemes. Telegram is a cloud-based instant messaging service that uses Voice over Internet Protocol (VoIP). Users can send messages and exchange photos, videos, stickers, audio and files of any kind. Messages can be sent to other users individually or to groups of up to 100,000 members. As of March 2018, Telegram had 200 million active users. Discord, published for the first time in 2015, has similar capabilities and 130 million users as of May 2018. Discord and Telegram are primary sources for cryptocurrent pumps and have been used for large scale pump and landfill schemes. Perhaps due to the regulatory gap, many of the pump groups do not hide their goals.

We identified 3,767 different pump signals advertised on Telegram and another 1,051 different pump signals advertised on Discord over a period of six months in 2018. The schemes have promoted more than 300 cryptocurrencies. These complete data provide the first measure of the pumping and discharge schemes in cryptocurrencies and suggest that this phenomenon is widespread and often quite profitable.

The data collection required for the analysis was considerable. The data on the pump were collected by collecting messages sent to hundreds of dedicated Discord and Telegram channels using their APIs and manually tagging the messages that signaled the pumps.

We also collected price data of nearly 2,000 coins through 220 cryptocurrency trading transactions from, the leading aggregate data website on cryptocurrency trading, during the six month period from January to July 2018. This gave us a total of 316.244,976 price data points through all the listed coins. The data collected are at most granularity presented by at the time of collection, that is, five minute intervals. We then matched the pump signals announced on Discord and Telegram with the trading data.

We then measured the "success" of the schemes, which we define as the percentage increase in price after a pump. Ten percent of the pumps on Telegram (Discord) increased the price by more than 18% (12%) in just five minutes. Recall that the period January-July 2018 was a period in which the prices of cryptocurrencies and the volume of trade were decreasing significantly. Thus, these percentage increases were "results" for the pumping schemes.

Finally, we examined what factors explained the ability to increase the price. The most important variable in explaining the success of the pump is the ranking of the currency, in which the ranking is based on market capitalization (which is highly correlated to the volume of trade). Coins with a lower market capitalization generally have a lower average trading volume. A low average volume gives the pumping system a greater chance of success.

We found that pumps that use dark coins with a low market capitalization were much more profitable than pumping the dominant currencies in the ecosystem – the average price increase was 3.5% (4.8%) for pumps on Discord (Telegram) using the first 75 coins; it was 23% (19%) of Discord (Telegram) for coins classified over 500. (bitcoin is the highest currency and holds first place.) We discuss the effect of other variables on the "success" of the pumps in our card.

Three other (essentially) competing documents also examine pump and dump schemes on cryptocurrencies, but with a different emphasis. Kamps and Kleinberg (2018) use market data to identify suspected pumps and landfills based on sudden price and volume spikes. They evaluate the accuracy of their predictions using a small sample of manually identified pump signals. Xu and Livshits (2018) use data on about 200 pump signals to build a model to predict which coins will be pumped. Their model distinguishes between highly successful pumps and all other trading activities on the stock exchange. Li et al. (2018) uses a pattern of differences in differences to show that the pump and landfills lower the trading price of the affected currencies.1

Our work is different from the other competing work in several important ways. First of all, we have collected as many pump signals as possible from the channels on Discord and Telegram. We also evaluate them all, without limiting ourselves to successful pumps. Secondly, we analyze the pumps reported for all coins with public trading data, not just those that are held on the selected stock exchanges. This allows us to incorporate ecosystem-wide explanatory variables such as the number of exchanges on which a currency is exchanged to assess what makes a pump and landfill scheme effective.

Why should we worry about pump and discharge schemes in cryptocurrencies? Recent trends indicate that bitcoin is becoming an important asset in the financial system. In addition, cryptocurrency asset trading has exploded while cryptocurrency market capitalization has grown surprisingly in recent years. In February 2014, the market capitalization of all cryptocurrencies was around $ 14 billion. As of February 2018, total market capitalization was about $ 414 billion, before falling back to $ 122 billion in December 2018. Bitcoin itself peaked at over $ 19,000 before collapsing in the next few months to $ 6,000. Currently (as in mid-December 2018), the bitcoin price is close to $ 4000.

In February 2018, there were over 300 cryptocurrencies with market capitalization between $ 1 million and $ 100 million. In January 2014, there were less than 30 coins with market capitalization between $ 1 million and $ 100 million. The markets of these cryptocurrencies are very thin and subject to manipulation.

Because traditional finance invests in cryptocurrency activities, it is important to understand how the cryptocurrency markets are susceptible to manipulation. We have provided the first measure of the broad spectrum of pump and landfill schemes. We encourage the nascent cryptocurrency industry, regulators and researchers to work together to try to eliminate manipulation in cryptocurrency resources.

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