Knowledge News & Updates

Pump and Dump. A deep look inside

Three university scholars – two from the #University of Florida and one from #Princeton – have concluded what many veteran #cryptocurrency enthusiasts have long known and loudly #preached: #pump-and-dump schemes are bad.

In a new paper currently in progress by Tao Li, #Donghwa #Shin, and #Baolian #Wang, the scholars provide evidence that market #manipulation #schemes “are detrimental to the liquidity and price of #cryptocurrencies.”

BTX readers may have an interest in the context of the #paper in relation to the recent activity at #YoBit, in which the exchange itself openly promised to #inject a ton of #money into random coins in order to inflate their #price.

What Is A #Pump-And-Dump Scheme?

For the #uninitiated, the term “pump-and-dump” might be #foreign. Therefore we should first #point out that these schemes did not begin with #cryptocurrency and they will be around# forever. That’s right: there is no eliminating the #pump and dump scheme so long as people are free to make trading #decisions on their own.

In any case, a “pump” is when a great #deal of value is injected into a given #stock, #symbol, or, in our case, cryptocurrency, in a #market sense. A hype cycle is often #involved, and new #products are especially likely to be #P&Ds. A lone #investor with a lot of capital or a small group of colluding #entities can make a huge difference in weak #markets. The examples in the #cryptosphere are endless. One or two #bitcoins can purchase a large amount of literally #thousands of different #coins, and if there are only a few #exchanges listing a given #token, the “price” will see a significant #rise.

The “dump” part of the #scheme is when the people acquiring the #asset and necessarily driving its price to ridiculous #highs #sell off their stake to people who are none the #wiser. The people buying at rates which previously would have been #unreasonable believe they are buying long-term, solid #assets. There is also a psychological #element to both gambling and investing in #which a #dominant part of the #human brain believes that things will be the way they are #today #tomorrow. The reality is that pump and dump schemes are hard to #regulate without hard facts and informants because often enough, on the #surface, they can appear like #healthy boom-time #trading.

The #cryptocurrency #sector has been rife with pump-and-dump schemes.

#High-risk #instruments trading has one goal: get out at the top, or nearest to the #top that you can. Experienced #traders understand that any #asset can turn to absolute crap #overnight. Traditional #stocks can dive on the news #ycle. The #fundamentals are what matter. But with even more high-risk #instruments, such as speculative# technologies and the #tokens that power them, the #fundamentals are incredibly difficult to gauge. This #reporter has dedicated a #substantial portion of his life to covering the happenings around #cryptocurrencies, tokens, and the like, and still he is overly #cautious in most #investments surrounding them due to the simple fact that the #future is unwritten, and something entirely unexpected can overshadow the #basket you dump all your #eggs into.

All of which is to say: #trading amidst a pump and dump #conspiracy is like being caught in a building #victimized by #arson. The# arsonist is most likely to get out with barely even any #smoke in his #lungs, if he gets burned at all. The rest of the #people #suffer by degrees. The last #person to sell loses the most #money.

Hype Is Very Important

The #hype cycle is important to most of these #schemes, but it is not absolutely necessary for #success. A pump-and-dump expert could potentially #fool a market mostly made up of trading #robots. Inside #information such as the said bots’ trading #triggers would help a great #deal. A pump-and-dump scheme can go for #weeks or months, or it can last a few #days. Often, #hundreds of smaller #traders participate in private #Telegram groups with the intent of making each other #richer.

As the scholars write:

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. A Telegram channel #operator can post messages for other #members to read. For a planned pump, the operator announces the #target date, time, and #exchange, usually at least one day in advance. However, they do not disclose the #identity of the target token until the scheduled time. #Members also receive multiple reminder #messages before the #announcement of the token symbol. As we show in this #paper, a typical #cryptocurrency P&D lasts for only several minutes. Therefore, it is reasonable to believe that #Telegram channel members are important #participants in P&Ds.

What it really #boils down to is having enough #money and the know-how to raise the price of a given #asset. We don’t use the word “value” because the actual value of a #token is relative to much more than what #people on markets are trading it for that #day. As an example, if #Bitcoin dove 75% again tomorrow, its actual “#value” would probably not be reflected in the #market price. Likely as not, it would cost more to #mine it, for a time, than it would to #buy it. But the value of #Bitcoin is much more than what people are willing to #pay for it at a given second. The price is a separate #thing.

The most successful #schemes happen at the launch of a #token or a coin and are perpetuated by the #creators or “team” themselves. Entire #blockchains have been created and #abandoned in the pursuit of sometimes small amounts of #Bitcoin.

But What Can Be Done?

As earlier stated, #pump and #dump #fraud is like any other unsavory activity: it will always be there. How much and how often it is allowed to affect the rest of #society is where positive #action is possible. The study done by the #authors reviewed a specific case, Bittrex, and its #tactics attempting to mitigate or #eliminate pumping and dumping on its platform. The #results were apparently positive in #nature:

Messages about #pump groups on Telegram show that #traders involved in P&D tactics had taken notice of the #warning. Many scheduled P&D #events were immediately canceled. For example, one prominent pump #channel, “Trading signals for crypto,” canceled its P&D event on #November 26, 2017. Some message groups #solicited feedback from #group members regarding whether to switch to other #exchanges. Many message groups eventually #ceased to pump tokens traded on #Bittrex and/or switched to alternative #exchanges such as Yobit.

Another #conclusion of the paper is that #newcomers are often looted of their initial #investment. Again, in so many ways crypto trading# parallels gambling: a new poker player might be bullied off his small #stake by insane bets on the part of a bluffing #veteran, or simply not know what they are doing and lose their #money that way. The major #difference is that a #gambler understands it’s a just a game, whereas most #investors are earnestly trying to make money, and often they are influenced by false #information or downright lies. #Resultantly, there is and may for the foreseeable #future be “significant wealth #transfer” from newcomers to immoral scam artists masquerading as #investors.

And as long as there is a #market for something, there will be a #provider. We can’t stress enough how absurd it is for an #exchange itself to openly “pump” coins at #random, as #Yobit have done. The next step is the #exchange operators simply running off with the #money, which has happened before. Perhaps it’s better than #exchanges which do it on the sly, as most every #exchange has been excused. Yet, there was long #speculation that #Crytpsy was pumping the price of #Paycoin and other tokens using customer #funds, and look what happened there.

Featured image from Shutterstock.

Leave a Comment

This website uses cookies to improve your experience. We'll assume you're ok with this. I love cookies Read More

Privacy & Cookies Policy