A group of three scholars from the University of Florida and Princeton University has studied and concluded in their paper that crypto pump and dump schemes are bad for the token economy or crypto space. These manipulations negatively impact the liquidity and price of crypto-currencies.

Traders and investors have known this all along that pump and dump schemes are bad. They tarnish the reputation of any market they set their foot into. But since any market where even a small amount of money can have a big influence is susceptible to pump and dump, such foul play is bound to happen.

For those who are new to the term “pump-and-dump” or “PnD”, it is a scheme or setup wherein an individual or group of individuals start buying a certain asset, thereby increasing its price and creating hype. When this hype drives others towards these assets increasing their price even further, huge selling is done and the market for that particular asset dumps heavily. All of this can happen in a few minutes, or hours. In some cases, a pump and dump can even last for days.

Breaking it down into smaller terms and taking the example of crypto, a pump is when a big amount of money is injected in a certain coin or token. Its price appears to be increasing which drives more people towards it. But more often than not, these surges may go unnoticed. Also, a pump generally requires a lot of capital or money to play out well. This is where social media comes into play.

Telegram’s Role in Crypto Pump and Dump Schemes

Telegram, a famous messaging app seems to be a favorite spot for pump and dump groups to form and thrive in. These groups start by gathering members and increasing their base investors. They then start circulating messages regarding the pump, how big it is going to be, and by spreading misinformation on everyone can benefit from it, making huge gains.

Days before the pump, they keep sending messages on the group (or groups) when the coin name will be announced asking everyone to be ready with their money. These are generally the coins and tokens which these groups keep accumulating for days so a sudden pump does not take place. As soon as the coin name is announced, new investors start buying the coin at market price. This is how a pump in that coin occurs.

If someone is buying, someone must definitely be selling. This is what these groups or schemers do after announcing the pump. They start putting sell orders and disposing of off their pre-purchased tokens, thereby making gigantic gains. This is how a dump occurs, where the price falls from the sky like a meteorite smashing into the ground. Everyone who joins these pumps loses money to save the ones who devise the scheme.

Yobit Pump and Dump

A famous example would be the case with the cryptocurrency exchange Yobit, where they publicly talked about injecting money and pumping the price of many tokens being traded on their platform. There are a lot of cryptocurrencies with a low market cap, and they can be as low as being influenced by only a few Bitcoins worth of capital. These are generally the targets of such schemes as it is easy to manipulate the market here.

One needs to be very cautious in crypto when it comes to making an investment. Fundamentals are important, but with ever-evolving speculative assets in digital form, it is difficult to gauge their quality. Thus, even experienced traders and investors have a hard time doing this in the crypto space. This is also another reason as to why being a part of a PnD group is extremely dangerous. The scheme being plotted will never hurt the plotters, but the other participants are bound to get burned down to the ground.

Tao Li, Donghwa Shin, and Baolin Wang are the three scholars working on this paper. This is what they have written about the organization and deployment of such schemes:

ICO Pump and Dump

If one knows the proper amount needed to raise the price of a coin and knows the way to let that money flow into the market, any coin can be pumped and dumped. Some people even use ICOs as pumps and dumps, wherein they create a major hype regarding a project in its initial stages. As soon as the coin hits the exchanges, the team dumps it for Bitcoin and abandons the project.

What the scholars after studying the case of Bittrex had to say is:

“Messages about pump groups on Telegram show that traders involved in P&D tactics had taken notice of the warning. Many scheduled P&D events were immediately canceled. For example, one prominent pump channel, “Trading signals for crypto,” canceled its P&D event on November 26, 2017. Some message groups solicited feedback from group members regarding whether to switch to other exchanges. Many message groups eventually ceased to pump tokens traded on Bittrex and/or switched to alternative exchanges such as Yobit.”

They also found out it is the new investors which these groups target as they are more vulnerable. They do not possess the required knowledge to understand this illness. And even in the foreseeable future, many more new investors will keep losing their money to these pump and dump scammers. A few ways to mitigate the risk is by reporting such channels on social media and raising awareness about the perils of participating in PnDs. Even the exchange platforms must find solutions to cease these activities before they occur, or by imposing penalties for such actions.