The infamous pump-and-dump scheme has been taken to new levels in the unregulated cryptocurrency market.
A recent analysis conducted by The Wall Street Journal shows that dozens of pump-and-dump trading groups have routinely manipulated the prices of cryptocurrencies on large online exchanges to an amount of at least $825 million in the past six months. These activities have been directly responsible for the loss of hundreds of millions of dollars in counterparty trades.
By reviewing trading data that was recorded between January to the end of July, the Journal identified 175 individual pump-and-dump schemes that involved 121 different digital coins.
Pump-and-dump schemes involve driving up the price of a specific asset before dumping it for a profit. This old trick often leaves traders uninvolved with the scheme out to dry with massive losses, making it a highly illegal practice in regulated markets.
Ben Yates, a cryptocurrency lawyer who works at RPC, has stated, “Cryptocurrency exchanges are unregulated markets, so the kind of market manipulation banned on, say, the New York Stock Exchange can essentially be carried out with impunity.”
Pump-and-dump schemes grew to prominence in the wake of the massive ICO surge that generated more than $20 billion over the past 18 months. The Journal found approximately 63 active pump-and-dump groups that operate on Telegram and Discord alone, which collected 236,000 followers as of the end of June. It was stated that many of these groups charge monthly fees that range from $50 to $250.
The Journal has identified “Big Pump Signal” as the largest pump group. After the launch of their chatroom on Telegram late last year, the group has promoted 26 pump operations that eventually saw $222 million in trades. The group currently has 74,000 followers on Telegram and has reached “capacity” on Discord.
Big Pump Group’s strategy includes announcing a date, exchange, and time for a pump, allowing traders to generate a buying frenzy, and then selling quickly. The process often lasts no longer than a few minutes, with successful traders publicly gloating about their quick gains in the chat rooms.
In early July, Big Pump Signal urged followers to begin purchasing CloakCoin (CLOAK), an obscure coin that was created for untraceable transactions, on Binance. The anonymous moderator noted, “@everyone be sure to ride the waves!” on the group’s Telegram. The buying occurred immediately, which saw the price of CloakCoin climb 50% to $5.77 before ultimately dropping almost a dollar after two minutes. In total, around 6,700 trades occurred, which surmounted to about $1.7 million total, in comparison to the virtually non-existent trading volume just an hour before.
Binance is often utilized for pumps as it currently offers a vast array of altcoins and offers lucrative referral rewards. The exchange has hundreds of coin listings, many of which have a low enough volume for pump groups to efficiently manipulate. Other, smaller exchanges, like Cryptopia and HitBTC, are often utilized by pump groups as well.
Given that most pump groups exist and operate in private chat rooms that may only be accessed by invitation, there are likely many more of these groups in existence. Ultimately, this means that there is the potential for tens of millions of additional dollars to be involved in such illicit trading activity on cryptocurrency exchange.