Buy! Buy! BYE! Crypto Traders’ Pump And Dump Price Manipulation Schemes
Pump groups feed millions of people in the business world, with price rises followed by rapid falls. So certainly dozens of trading groups are manipulating the price of cryptocurrencies on some of the largest online exchanges, generating at least $825 million in trading volume over the last six months, and hundreds of millions in losses for those on the wrong side of the market.
In a review of trade data and online communications between traders since January until the end of July, the Wall Street Journal identified 175 “pump and dump” schemes with 121 different digital currencies, showing a sudden price increase and an equally sudden drop some minutes later.
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Almost half of the 50 pumping schemes with the most pronounced price increase lost value afterwards.
A “pump and dump” scheme is one of the oldest types of fraud on the market: traders talk about the price of an asset before they get rid of it to make a profit and leave investors fooled by reduced stocks.
The U.S. Securities and Exchange Commission (SEC) regularly files civil cases alleging the use of publicly traded pumps and landfills. The manipulations of cryptocurrencies are no different, but regulators have yet to present a more opaque case on the market for them.
“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,”
said Ben Yates, a cryptocurrency lawyer at the London-based company RPC.
The boiler rooms of the past have an analogue room online in the “pump group” – a room where coin traders meet. The largest of the dozens analyzed by the WSJ is Big Pump Signal, with more than 74,000 followers in the Telegram messaging application.
It is also the most prolific after launching its chat room in Telegram in late December, after reaching the capacity of another messaging application, Discord, the group promoted 26 pumping operations that generated trades worth $222 million.
There are many more such groups, which could add millions or tens of millions more activity, but which operate in private chat rooms, which are accessible by invitation only, usually supervised by an anonymous moderator.
These schemes became more ubiquitous after the recent explosion of Initial Coin Offerings (ICOs), digital tokens similar to securities that are sold by new companies to raise funds for projects. ICOs raised nearly $20 billion dollars in the last 18 months, compared to $300 million dollars raised between 2014 and 2016.
Big Pump Signal's strategy is simple, like that of other groups who pump coins: there is an announcement of the date, time and change for a pump; at the set time, somebody announces the currency being pumped, they let traders create a buying frenzy and then they quickly sell. Everything can happen in minutes, and successful traders publicly gloat over their profits.
One day in early July, for example, Big Pump Signal ordered its many followers to start buying a black coin created for untraceable transactions called Cloakcoin (CLOAK), at exactly 3 p.m. EDT in a bag called Binance. The anonymous moderator of the group's telegram channel urged everyone to get on the waves.
Cases Like Cloakcoin (CLOAK) – Real Time Pump
The price of the layer coin skyrocketed at the Binance cryptocurrency exchange shortly after Big Pump Signal sent a message in Telegram to fans telling them to buy. The prices of Binance's ten most traded pairs of bitcoins barely moved during the Cloakcoin pumping.
The mania to buy was immediate: the price of cloakcoin rose 50% to $5.77 on the stock market before falling almost a dollar after two minutes. In total, 6,700 transactions valued at $1.7 million were executed, compared to almost no trading in the previous hour.
Similar practices were banned in the 1930s when groups of traders bought and sold shares among themselves to inflate the price before unloading it to the public. However, pumps and dumps proliferated during the dot-com boom, driven by brokerages like the famous Stratton Oakmont, founded by the Wall Street Wolf, Jordan Belfort. In 1999, Mr. Belfort pleaded guilty to securities fraud charges for the operation of pumps and landfills that affected 34 companies and cost investors more than $200 million in losses.
Like the other active groups, the operation of Big Pump Signal is a mystery: the moderator is anonymous; the ownership of an associated website is hidden; and attempts to contact the moderator were unsuccessful.
Many of the groups charge monthly fees ranging from $50 to $250 or require members to evangelize the service in order to access business information. One operation, Cosmic Trading, announces the formation and publishes the pumping signals of other groups, for a price.
It is not known how much “pumpers” earn, as stock exchanges do not publish investor records. But traders have the advantage of selecting the currency, buying it at the bottom and selling it at the highest point they choose.
Binance, currently the largest virtual currency exchange by trading volume, according to CoinMarketCap, is frequently used for pumps. It has hundreds of coin lists, many of them small enough for a group of pumps to buy and control effectively.
The Big Pump Signal target coins in the last six months are typical of pump groups: coins with enough trading activity to gain wider interest, attract new traders, and cheap enough for people to buy a significant share.
Some of the group's most successful pumps include coins with names like Pesetacoin (PTC), Stealth (XST) and Agrello (DLT), each of which cost between 6 and 31 cents per coin before the pump was announced.
Big Pump Signal's most successful efforts increased the price of three cheap coins by more than 70% each compared to pre-advertising trading.
CLOAK was an intermediate pump for Big Pump Signal. The currency was traded on only eight exchanges and ranked 225th among other cryptos at CoinMarketCap in early July, which tracks market activity through more than 1,600 currencies.
On the pump performed in July, the richest trades occurred in the first minute of trading. The biggest trade was $11,000, moments after the moderator's order caused the price to skyrocket.
“Obviously, we were surprised,” said Harry Sidiropoulos, cloakcoin’s marketing manager. “We cannot say why it happened, but it’s definitely not from our side.”