University Researchers Analyze Cryptocurrency Pump and Dump Schemes
Two university scholars from the University of Florida and one from Princeton have reached a conclusion that, no disrespect to them intended, is pretty obvious: pump and dump schemes are very bad.
According to a new paper that has the very creative title of “Cryptocurrency Pump and Dump Schemes”, Tao Li, Baolian Wang and their colleague from Princeton, Donghwa Shin, have affirmed that pump and dump schemes are pervasive in the crypto market and that they are very bad for the whole market and community. The article has 59 pages and it was posted on October 23.
In the article, the developers state that there is plenty of evidence that there are, in fact, manipulation schemes going on in the market right now and that they are detrimental to the liquidity and price of the cryptos.
The researchers affirm that these events create bubbles that feature dramatic increases in price and volatility soon followed by a reversal in all that and that some few people take the profit while a lot of the other simply lose money after the dumps. The study uses causal evidence to prove that pump and dump schemes are bad for the economy.
What Are Pump And Dump Schemes And How Are They Done?
Basically, pumps and dumps are when you “pump” value into an asset in order to inflate its real value and then create a hype cycle for it. This makes the prices go up and then there is the dump part, in which you get your profits while the price diminished for everyone else.
A pump and dump scheme is basically a sort of deficiency in the market that happens when people are allowed to do it and to overhype products. Therefore, they have a “natural” point to them as people who trade in a free environment will be able to use them, but they can be curbed with laws and regulation, so unregulated spaces like the crypto space suffer more from them.
Some people believe that pump and dumps are not preventable, but that is far from the truth. By diminishing the ability of the traders to manipulate the market, you may also diminish their power to do it. However, this generally comes with a lower freedom to interact with the market, so the great final point is that you either live with the problem or you lose some of your freedom to stop it (and it might not work as well as intended).
As this would generally devolve into a useless conversation on whether regulated or unregulated markets are better, the point that you have to understand is that everything is linked to the real strength of a market and of the manipulator.
In a weak market, like many of the altcoins ones, if a powerful group buys a lot of cryptos, they can pump the market, only to sell the assets later and dump them. There are psychological elements involved in the process which lead investors to believe that it is a good idea to buy the assets during the pump phase but all is simply an illusion.
The main difficulty in regulating markets against pump and dumps is that you need a lot of information and control over a market because the pumps may seem like a healthy boom run on the surface. Take Bitcoin, for instance. Some people are arguing up until today whether the current bear trend was caused by a hype pump or not.
If you follow one tip, it is to never fall too much into the hype. While these “scams” can work without hype if an investor simply decides to buy a huge quantity of assets and manipulate the market, a lot of people use the media to hype markets in order to pump them. Because of this, it is important be well-informed with really trustworthy sources before you invest.
If you have enough money, power and freedom to pump an asset, you can do it. The smart thing for all the other people to do is to simply not fall in the trap.
As the researchers have affirmed on the article, manipulators often create “pump groups” using Telegram and invite other investors. They use advertisement and plan the date of the pump and only tell which asset will be pumped right when the time is up. The whole process may take only minutes sometimes.
Some of the conclusions reached by the researchers were that that newcomers generally lose money in pumps due to be scammed by older pumpers and that this market is essentially very hard to regulate, especially in the crypto market.
In fact, we have recently reported a story in which Yobit, a prominent crypto exchange, basically was telling its client to pump. The market is so full of people with bad attitudes that it seems almost impossible to actually solve this problem in the foreseeable future, so you should at least try to escape from it yourself.