A Ruse Unchanged: Crypto Pump and Dump Groups “Pervasive,” Academics Claim

A team of seven economist scholars has found that pump and dump schemes in cryptocurrency trading are ‘pervasive’:

“The surge of interest in cryptocurrencies has been accompanied by a proliferation of fraud. This paper examines a pervasive tactic long known to financial markets: pump and dump schemes. While the fundamentals of the ruse have not changed in the last century, the recent explosion of nearly 2,000 cryptocurrencies in a largely unregulated environment has greatly expanded the scope for abuse.”

The scholars from the Berglas School of Economics at Tel Aviv University and the Tandy School of Computer Science in Tulsa analyzed 316 million price data points. They identified 3,767 different advertised “pump signal” groups on the Telegram messaging app and 1,051 similar groups communicating on Discord between January and July 2018.

All told, the groups promoted more than 300 cryptocurrencies trading on 220 exchanges.

The scholars point out that although pump and dump schemes have been illegal in the US since the 1930s, they have persisted there in various forms.

Notorious stock pumper Jordan Belfort was immortalized in the Martin Scorsese movie “The Wolf of Wall Street,” a fictionalized depiction of the days Belfort ran Stratton Oakmont in the 1990s.

Back then, the now reformed fraudster would order his legion brokers to conduct a coordinate upsell of a given penny stock based on no fundamentals whatsoever.

The price would rise and a cynical Belfort would then signal his brokers to sell, leaving naive retail investors “holding the bag” as Belfort spent a million dollars a night on debauched parties several times over.

Belfort was eventually convicted for securities fraud and was imprisoned. He spent part of last year doing penance by warning people that Bitcoin was a similarly manipulated “bubble.”

Few, including this writer, listened seriously at the time.

For the past several years, crypto pump and dumps have used similar mechanisms, except the boiler room of brokers is now a social app like Telegram with its 200 million users, or Discord, where 130 million messagers mingle.

“These schemes inflate the price of an asset temporarily so a select few can sell at the artificially higher price,” write the Tel Aviv/Tulsa scholars. The Wolf of Wall Street has become many many wolves indeed.

Like penny stocks, “low-cap cryptos,” meaning coins with some substance but not a lot of subscribers are more successfully pumped, the scholars found:

“Coins with lower market capitalization typically have lower average trading volume. Lower average volume gives the pump scheme a greater likelihood of success. We found that pumps using obscure coins with low market capitalization were much more profitable than pumping the dominant coins in the ecosystem: The median 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.”

Cryptocurrencies have been widely lauded as the means of capitalizing “the new Internet,” and the money earned by “early investors” has made that story very appealing.

Repeated claims from experienced software developers that Ethereum (the system upon which most of the “small crap” cryptos have been built) is “vapourware” have gone largely unheeded. The tech has been sold many times over before being proven (it is still largely unbuilt and unproven) and “bag holders” (non-cynical investors) have been told to wait, for decades if necessary, for the tech to materialize.

Meanwhile, cynic traders strike against coin “hodlers” through their Telegram and Discord groups of 100 000 members, and regulators wait until the whole shakedown is obvious and enough perpetrators -and main street investors, evidently- have hung themselves.

The scholars note:

“…(R)egulators have yet to prosecute pump and dumps involving cryptocurrencies…(U)nlike stocks, commodities, or fiat currency – cryptocurrencies do not have a regulatory agency in charge of all cryptocurrency policy.”

The predominant ethos in the cryptospehere, in which I directly circulated, is that not only must regulators not step in and step on “innovation,” they should also stop being such decrepit party poopers and bank-monopoly protectors- even if the party is a rip off session.

The crypto rip off can even be bot-aided, write the scholars:

“Krafft et al. created bots that executed penny trades in 217 different cryptocurrency markets. While their intent was not to incite bubbletype behavior, their bots created large price swings in the individual currencies after buying a pennies worth.”

Pumping was also identified on the Mt Gox exchange, where users were eventually robbed of 600 000 bitcoins by conscience-less cryptonauts:

“Gandal et al… identify and analyze the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired…the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity.”

One of the awesome price moves often cited among bitcoiners is the almost 9X jump of 2013. Turns out that too may have been a pump:

“They conclude that the suspicious trading activity by the Mt. Gox exchange itself likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.”

The Tulsa/ Tel Aviv also cite the Griffin/Shams work on Tether, a so-called “stable coin” those scholars claim was issued by the hundreds of millions and used to “stabilize” the price of Bitcoin in 2017.

Griffin and Shams have posited that the artificial stabilization induced by tethers may have attracted neophyte investors to the coin, which was then massively “dumped” by seasoned traders at $20 000 USD each last December.

Meanwhile, in the background, experienced crypto investors are well off Bitcoin and are working games on small coins using the messaging groups and/or big positions.

The Tulsa/Tel Aviv scholars offer the following Telegram/Discord pump group taxonomy:

  1. Obvious pumps: use actual “pump” and “dump” language in signals; announced schemes 24-48 hours before they occur; use “premium membership” schemes (purchased or based on drawing people to the scheme); use “collaboration pumps”- pumps coordinated with other channels.
  2. Target pumps: less “brazen”; members in chat groups not sure the actions legal, so avoid pump and dump language; “They had many more pump signals than the first category. They posted the name of the coin and the current price, without any previous announcement. They usually tried to announce the exchange as well. They also gave target prices asking participants to sell at any of these prices…”
  3. Copied pumps: generally they tracked pumps elsewhere, posting about them several hours later. “…some of these channels had a large number of followers suggesting that they were capable of creating pumps on their own.”

All this is relevant because trying to establish a base value for bitcoin requires a real sense of its true utility- a fundamental from which price seems to have been detached for some time.

Bitcoin has also been questioned for being a closed and zero-sum system resembling a pyramid scheme where the only price lift is brought by more broadly-tapped investors.

If that is the case, Bitcoin’s only value is in its utility as a hedge or as a method of cross-border (and under-the-radar?) “value transmission,” virtues pump and dumpers evidently don’t particularly care about.

“These comprehensive data provide the first measure of the scope of pump and dump schemes involving cryptocurrencies and suggest that this phenomenon is widespread. The scope should raise “red flags” for regulators, especially as mainstream financial institutions begin investing in cryptocurrencies”

It is an incontrovertible fact that a good portion of the crypto subcultures finds manipulation a banal matter of unconcern.

In the spring of this year, the New York Attorney General’s office sent a comprehensive questionnaire to cryptocurrency exchanges it believed were serving New York investors. The NYAG gave the exchanges two weeks to respond.

In the report summarizing the results of the questionnaire, the AG wrote:

“Four platforms – Binance Limited, Gate.io (operated by Gate Technology Incorporated), Huobi Global Limited, and Kraken (operated by Payward, Inc.) – claimed they do not allow trading from New York and declined to participate. The OAG investigated whether those platforms accepted trades from within New York State. Based on this investigation, the OAG referred Binance, Gate.io, and Kraken to the Department of Financial Services for potential violation of New York’s virtual currency regulations.”

At the time the questionnaire was issued time, Kraken wrote on the company blog that the NYAG’s request for information was onerous, ill-prepared and overreaching:

“It’s an overly broad fishing expedition that asks questions irrelevant to the stated objective and misses obvious questions that actually would be helpful.”

The exchange also wrote that much of the requested info had already been provided elsewhere, was proprietary, or was, “…highly sensitive and kept confidential for security reasons.”

Kraken also wrote that its traders were unconcerned about manipulation:

“What else doesn’t matter to most crypto traders:

  1. Licenses and regulatory approval
  2. Being protected from market manipulation
  3. Being protected from making risky investments
  4. Conforming to Wall St.’s image of what crypto markets should be

That’s all there is to say about New York.”

That blog post was published in April, and the CEO of Kraken, Jesse Powell, and others (including Roger Ver, Jihan Wu, Bitmain, and the Kraken parent company, Payward, Inc) were recently named in a lawsuit alleging, “…intentional fraud and market manipulation surrounding the recent Bitcoin Cash BCH update.”

Kraken is also now seeking investors in a private funding round, and has claimed the exchange is valued at $4 billion dollars.

At the end of their 19-page report, the scholars conclude:

“Regulators should be very concerned that price manipulation via pump and dump schemes is so widespread.”

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