Crypto Pump & Dump Fraud Schemes Are Widespread, Study Finds

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A new study by the Social Science Research Network (SSRN) suggests that the phenomenon of pump-and-dump within the crypto community is widespread, thus raising a number of important concerns for industry regulators.

What is pump-and-dump?

Pump-and-dump schemes are based on the artificial increase of an asset price, typically by a group of traders looking to make a quick profit. By coordinating a large-scale purchase of an asset and then selling their positions at a higher price, the investors are making a guaranteed profit while affecting the profits of honest traders.

The United States Securities and Exchange Commission (SEC) qualifies pump-and-dump schemes as security fraud.

Telegram and Discord, both rife with pump-and-dump schemes

The research looked at Telegram and Discord, two messaging apps that are widely used by members of the crypto community. Studying data spanning more than six months (January – July 2018), the study found nearly 5,000 pump-and-dump schemes on the two platforms (1,051 on Discord and 3,767 on Telegram).

The study found that pump-and-dump schemes can be both overt – openly using the words “pump” and “dump” – and more subtle. While “obvious pumps” are easy to identify, “target pumps” avoid mentioning the name of the scheme, using the name of the asset and the current selling price to announce the beginning of a pump-and-dump operation.

Pump-and-dump schemes can be very profitable

According to the study, 10% of the schemes – both obvious and target pumps – resulted in a price increase of more than 18% (on Telegram) and 12% (on Discord). These results make the schemes very profitable, considering the falling crypto prices during the six-month span of the study.

At least 82 pumps targeting Bitcoin have been identified on Discord and Telegram, though the most profitable schemes targeted obscure coins: “We […] found out that the most important variable in explaining success of the pump is the ranking of the coin. While there are attempts to pump coins spanning a wide variety of ranking, pumping obscure coins gave the pump scheme a greater likelihood of success.”

The accessibility of starting such a scheme is one of the main reasons of concern for regulators. The study argues: “The proliferation of cryptocurrencies and changes in technology have made it relatively easy (and virtually costless) for individuals to coordinate and conduct pump and dump schemes.”

A warning call for regulators

The proliferation of the phenomenon is worrying, with researchers calling for better regulation of the industry.

The study states: “In terms of scope, we found that this pump and dump phenomenon is widespread on both Discord and Telegram. […] Regulators should be very concerned that price manipulation via pump and dump schemes is so widespread.”

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