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Prices of over 300 cryptocurrencies manipulated

7 Jan 2019 14:22|Bartosz Grejner

"Users of two social networks influenced the prices of over 300 cryptocurrencies, including bitcoin. The median of price increases resulting from this was even over 20%," writes Bartosz Grejner, Conotoxia Analyst.

Even though at the end of 2018 cryptocurrency prices fell in relation to the level from 12 months ago, there were still many attempts of fraud with the use of virtual currencies. The US Department of Justice and SEC (United States Securities and Exchange Commission), among others, have already been dealing with such incidents. Scientists from universities in New Mexico, Tulsa and Tel Aviv addressed this issue in a study entitled "The Economics of Cryptocurrency Pump and Dump Schemes".

They analysed data from two social network platforms: Telegram (communications app) and Discord (voice and text chat service, very popular among gamers). Both services are very popular and are used by 130 and 200 million users, respectively. From the data collected between January and July 2018, they identified 4818 pump and dump signals - 3767 on Telegram and 1051 on Discord. The scheme behind this manipulation consists of artificially increasing the price and selling a cheaply purchased instrument at a high value before it falls back. During this period, only on these two platforms, the problem affected more than 300 cryptocurrencies (out of the currently existing slightly over 2,000).

The smaller, the more vulnerable

In most cases, users did not even try to hide using the word "pump" or "dump" to make their intentions clear. Those channels also often had paid membership plans. They enabled users to obtain precise information on when and where prices would be pumped well in advance. Usually, it took place 24-48 hours before the planned manipulation, and then after only a few hours they published the results of their operations. Collaborative price pumping was used many times as well. At the same time, on many channels, bots published the name of the cryptocurrency in order to increase the turnover (as a result of reaching larger price spikes).

The smaller the market value of the cryptocurrency the easier for such manipulation to be carried out. The data from the aforementioned study confirms this. The "pump and dump" scheme turned out to be the most profitable among the cryptocurrencies, which were ranked below 500 according to the Coinmarketcap list.

The median of price increase achieved while using Discord signals was 23.23%, and when using Telegram 18.74%. It is harder to achieve a similar effect in the case of a larger cryptocurrency, which does not mean that it would be impossible. However, for the 75 largest cryptocurrencies the median of price increase after the Discord signals amounted to 3.51%, and with Telegram 4.81%.

Bitcoin as one of the victims

Bitcoin still remains the biggest cryptocurrency, with a market share of over 50%. However, its position does not protect it from price manipulation. Only 1.7% of the signals from Discord and Telegram concerned bitcoin, but it shows that this process of pumping and dumping can affect any cryptocurrency.

The "pump and dump" scheme is, of course, not exclusive to cryptocurrencies. This problem has long affected also traditional financial instruments, listed on the biggest stock exchanges, and very often penny stocks, i.e. shares of companies whose price is less than one dollar. The same type of manipulation could be observed in the movie The Wolf of Wall Street, based on authentic events. If you sometimes look into the spam folder in your email inbox, some of the messages may in fact be related to this practice. Virtual currencies are particularly vulnerable to this due to the still extremely low level of regulation, which is also supported by the dilution of trading any given cryptocurrency on to many exchanges. Regardless of their current value, one should remember that some significant price movements may be simply manipulation, which only increases the risk of investment, especially in those smaller cap cryptocurrencies.

7 Jan 2019 14:22|Bartosz Grejner

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