The crypto space often gets a bad rap for its failure to prevent price manipulations. We’ve seen many cases where coordinated groups of people, led by crypto whales, have pumped the price of a coin to tens and hundreds of percentage gains, before dumping it back to its normal levels, leaving a few people richer, and a whole lot more significantly poorer.
The question of how significant this problem is has remained an open one for many years. However, a new study published by economists from the University of Tulsa, University of New Mexico, and Tel Aviv University seem to have finally revealed the answer, and to almost no one’s surprise, it’s shockingly bad.
The economists identified as much as 4818 pump and dump schemes involving 300 different cryptocurrencies during six months (from mid-January to early July). The economists found that the schemes were “widespread” and “often quite profitable.” 3,767 of the 4,818 instances were on Telegram alone.
10% of the pumps on Telegram increased the price by more than 18%, while Discord pumps increased the price by more than 12%. In both cases, the pumps occurred within in just five minutes.
What Are Telegram and Discord Signal Groups?
The study was conducted by collecting pump signals from Telegram and Discord groups. Pump signals are announcements that tell people to buy a specific cryptocurrency at a particular time and price. The group admin usually makes an initial announcement 24-48 hours before the date of the pump. Then post reminders about the upcoming pump, with messages saying things like “only 10 hours left until the next massive pump”, or “Our last pump generated over 100% gain for traders”. This is an apparent effort to entice new and current pump signal followers to join in on the upcoming pump.
The coin that is scheduled to pump is kept secret up until the announcement, and often revealed as a picture instead of text.
This is supposed to ensure that no traders can program a bot that buys automatically and immediately. However what ends up happening is that those who own the pump signals group and are coordinating the scheme will already have an advantage, and often may even charge traders money to receive the coin announcement earlier than everyone else.
At its core, pump and dump schemes must always have victims, that’s the only way it can work out. For the first coin buyers to make a profit, a second group has to buy the coins later than them and for a higher price. The second group can only make a profit when a later group buys the coin at a higher price than they bought it for.
This process goes on until the last unfortunate group of people purchases the pumped coin at a price that no one else is willing to buy at. Then, just as quickly as the price skyrocketed, it plummets back down and leaves the last buyers with half or all of their money gone. This whole process can take as little as 5 minutes.
P&D Provides a Reason For Self-Regulation
The report provides a complete look at the severity of the price manipulation problem occurring in crypto and is clear evidence for why some form of self-regulation (using the same decentralized technologies that enable such fraudulent activity to occur) should be implemented.
Other studies have also been conducted on this topic including a review by Imperial College London which found that around $7 million worth of cryptocurrency trading volume is the result of pump-and-dump schemes.