New research reveals how pump and dump schemes work in the crypto market

A new research paper from the College of Technology at Syndey has found that pump and dump schemes are rampant in the crypto market, at least 355 market manipulations occurred in the past 7 months. Up to 23 million people participated in these programs.

However, these pump and dump schemes are hardly the same as those that have been plaguing the stock market for decades. Everyone in the crypto market seems to be well aware of what they are doing.

A special kind of pump and dump scheme has emerged in the crypto industry

While it’s undeniable that the crypto market has become too large to be ignored by both governments and major institutions, some aspects of it are still a thorn in the eyes of many regulators.

The most common type of market manipulation seen in the crypto space are pump and dump schemes. Most commonly associated with traditional stock markets, a pump and dump scheme is an manipulation technique in which traders hold long positions and then artificially inflate or pump prices before deflecting. their position at a high price.

In an article titled “A New Wolf in Town: Manipulating Pump and Dump in Crypto Markets,” Anirudh Dhawan and Talis J. Putniņš found that the manipulations seen in the crypto industry differ from The manipulations found in the stock market are an important factor, perceptions of the participants.

According to the article, the most important difference is that during crypto pump and dump, manipulators don’t pretend to have personal information about a particular token that is undervalued. In a conventional pump and dump scheme, manipulators try to persuade investors to buy stocks by spreading false or overblown positive news about stocks in order to attract investors. private.

Instead, crypto pump and dump plans are publicly discussed in Telegram or Discord groups and the “pump signal” on any given coin is publicly announced.

“Cryptocurrency manipulators don’t usually try to trick people into believing a coin is mispriced on the basis of fundamentals. They clearly announce to their pumping group members that a coin is being pumped, as opposed to representing a great investment opportunity.

While this may not sound strange for experienced traders, this is a relatively new feature in financial markets. It also raises two very interesting questions that the researchers tried to answer in their research paper:

First, why are people involved in these pumps, and second, how can manipulators benefit if they don’t trick any other participant?

An adventure game for overconfident traders and gamblers
Since the pump delivers negative expected returns to anyone later than the manipulator, the study concludes that rational individuals do not participate in pump and dump schemes.

However, there are two specific types of traders involved in such schemes.

According to the article, the first category is overconfident traders who overestimate their ability to sell tokens at the highest price. The second is the gamblers.

Overconfident individuals who believe they are more skilled than the average cryptocurrency trader generally expect to enter and exit the pump faster than others. This is so common in the market that, when considering enough parameters, it is possible to calculate the expected return of a pump for an overconfident individual. Another interesting finding is that overconfident traders tend to prefer less liquid coins when participating in pump and dump schemes.

Unlike overconfident traders, the second major group that participates in pump and dump bouts does not see this type of market manipulation as a one-off chance of payback. Players with gambling logic tend to prefer “lottery-like” assets. They don’t participate in a pump and dump, but participate in a series of conspiracies that make up a game.

Mechanism of a pump and dump plan

To spot cases of market manipulation in the crypto market, researchers dug into chat history data from Telegram’s pump and dump channels to uncover cases where administrators Assigned pre-specified date, time and exchange for the pump. After cross-reference with pump data from Binance and Yobit, the researchers identified 355 pump and dump waves that occurred between December 2017 and June 2018.

In 7 months, 1,307 cryptocurrencies were traded on two exchanges. However, since researchers were only able to collect all the necessary data for 197 coins, they conclude that about 15% of all coins have experienced at least one pump and dump manipulation during that time. In fact, this number could be close to 30%.

However, figures show that pump and dump manipulation is common and frequent.

The trading volume during these pump and dump also makes economic sense. It was reported that around $ 350 million were traded in the 355 pumps.

An example of a well executed pump and dump is ChatCoin (CHAT). According to the study, the pump is run on the group ‘Big Pump Sigal’ (BPS) on Telegram. With 63,000 members, this group is filled with manipulators who control the pumps and traders eager to reap profits.

The administrators of the group announced the exchange, the data, and when the pump will take place, but not the actual coins that will be pumped. Announcements like these allow the participants to prepare for the trade by moving money into the exchange and waiting for the so-called “pump signals”.

Pump and dump signal from closed group on telegram

In this case, the signal is an announcement of the coin being pumped. The signals are usually announced via images, as shown in the screen above, to prevent messages from automatically flagging.

ChatCoin’s price volatility before and after the support pump signal claims that the pumps typically target low-liquidity cryptocurrencies. While the chart below doesn’t go any further than 15 minutes before the signal, the price of the CHAT is low and relatively stable for days at around $ 0.06. The pump signal, given at 20:00 GMT on June 10, 2018, caused the CHAT to go parabolic and peaked just over $ 0.09 in about 17 seconds after the pump signal.

Diagrams before, during and after pumping | Source: Research paper

The importance of market manipulation research

Although the use of resources to conduct research is so extensive that this may seem futile to some, current market conditions only highlight its importance. Anirudh Dhawan, one of the authors of the article, said that it is important to research these plans as they damage the reputation and integrity of the entire crypto market:

“Institutions have the ability to stay away from these markets and regulators are likely to use this manipulation as a pretext to prevent market expansion moves. Like the SEC did in the case of a Bitcoin ETF ”.

Besides, these types of plans provide a useful data set for testing market manipulation. Dhawan adds that you often don’t see market manipulation going outdoors, as is the case with crypto pump and dump, giving them a rare chance to study a relatively frequent phenomenon. financial market.

“Our goal with this research project is to bring these kinds of manipulation schemes to light and to consider why people are involved in these schemes,” he said.

The research could act as a useful base for both companies in the crypto industry and government institutions looking to regulate them. Currently, the lack of both regulation and its enforcement allows this type of manipulation to exist and flourish. Such extensive manipulation ultimately leads to a loss of confidence in the cryptocurrency market, which in turn hinders its development.

The only thing left to do is find the right balance between and enforce the regulations that enable a safe and healthy market without suffocating it.

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