“Pump and dump” crypto schemes make millions, paper alleges

Organized groups powered by online chat apps are using price manipulation techniques to cash in to the tune of hundreds of millions of dollars, a major financial newspaper has alleged.

The Wall Street Journal’s recent study of over 100 cryptocurrencies found that the old-fashioned technique of price pumping is a popular way for organizers of these schemes to artificially inflate the price of instruments in order to make money.

A price pump is a prepared, group-based attempt to buy up a cheap asset to boost its value in order to sell it on almost straight away for a big profit.

According to the paper’s findings, the cryptocurrency world is rife with this kind of activity.

The paper looked at 121 blockchain-powered online currencies. It discovered that there were around 175 potential price inflation schemes occurring.

One of the case studies offered by the paper was Cloakcoin, a cryptocurrency which appeared to experience some of the hallmarks of a price pump.

On 1 July, for example, there were over 6,000 positions on the coin opened in less than five minutes, causing the price to spike – despite hardly any in the 60 minutes up to that point.

Much of the allegedly fraudulent activity is believed to take place via encrypted chat and messaging systems such as Telegram.

One group on the platform, called “Big Pump Signal”, is believed to have almost 75,000 followers. These groups schedule in a price pump in advance, and at the designated time they all move in to buy a piece of a coin.

Once the contagion effect has spread outside of the group and others have bought in, they then sell at a profit.

The Wall Street Journal is not, however, the first to notice that this type of fraud may be going on in the cryptocurrency markets. Last year, the US Department of Justice began looking into market manipulation in the cryptocurrency world.

And this kind of behavior is not limited to the cryptocurrency markets, either.

Jordan Belfort, as chronicled in The Wolf of Wall Street, was convicted after his old brokerage house – Stratton Oakmont – ran several pump and dump schemes.

In the case of cryptocurrency, it’s a little less clear what laws the activity is breaking – and, more importantly, who is responsible for regulating it.

Usually, the US Securities and Exchange Commission (SEC) would be responsible for tackling the issue.

However, the SEC has in some ways washed its hands of some cryptocurrencies, such as Bitcoin, on technical grounds. Other cryptocurrencies, like Ripple, are considered by some to be securities because they have a number of more centralized features which resemble the instruments typically regulated by the SEC.

Until this regulatory issue is cleared up, it’s unlikely that there will be a simple answer to the question of how to control the pump and dump schemes and how to prevent them from happening in the future.

Chris Lee

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