Over $7M of Cryptocurrency Monthly Trading Volume Generated by Pump and Dump Schemes

Cryptocurrency pump-and-dump schemes happen twice a day on average and generate big trading volumes.

Pump-and-dump schemes have been plaguing cryptocurrency markets for a long time with about $7 million of average monthly trading volume attributed to scams and unfair practices, according to the latest research published by MIT Technology Review.

Jiahua Xu and Benjamin Livshits from Imperial College London analyzed manipulative strategies to see how they work and find a way to spot them at early stages.

What is a pump-and-dump

This form of price manipulations is nothing new in the financial universe. It has been used a lot with securities since early 2000 to boost the price of penny-stocks by spreading rumors and creating FOMO (fear of missing out) sentiments only to "dump" a grossly overvalued asset. The price then collapses leaving investors with heavy losses.

Considering the unregulated nature of the cryptocurrency market and low level of investor protection, regulators globally are worried about the wide-scale usage of pump-and-dump schemes with digital assets.

Back in February, The US Commodity Futures Trading Commission published a warning about this type of financial fraud as applied to virtual assets. The regulator described the way the scam is organized and urged investors to exercise vigilance with overhyped coins.

Someone makes big money                                                        

According to  Xu and Livshits's finding, two pump-and-dump schemes are carried out every day, generating a trading volume of about $7 million a month. Many people participate in this strategy hoping to earn a quick buck, though only organizers make a significant profit, while others are at risk to lose money.

"Indeed, part of the ruse is that the “pump” is entirely automated and random, so that nobody can take advantage of insider information and that only quick reactions and judgment determine who wins," the researches write.

BVB case

Xu and Livshits looked at the BVB coin pump and dump revealed by McAfee Pump Signals. They recorded the price changes and compared them with the trading volumes for the coin to see what happened.

The coin was created in 2016 and demonstrated few signs of life until November 14, 2018. That's when the fun began. The coin's price surged from 35 satoshis ($0.00132202) to 115 satoshis ($0.00434378) in a matter of 18 seconds. Three minutes later the scheme participants started taking profit, and the price dropped below the initial level. Those who bought 18 seconds after the beginning, most likely incurred losses.

“The study reveals that pump and dump organizers can easily use their insider information to take extra gain at the sacrifice of fellow pumpers,” the research revealed.

The researchers used historical data and a machine-learning algorithm to reveal early signals of upcoming pump and dump schemes by looking for unexpected trades in obscure coins. While this method may not guarantee 100% protection from scams, the deep understanding of how the schemes work will help to prevent them from spending and limit losses.

A separate investigation carried out by the Wall Street Journal revealed that pump-and-dump turnover exceeded $800 million in the first half of 2018.

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