“Pump and dump” schemes are around since long before cryptocurrency was invented. What’s striking about the crypto markets is that this sort of manipulation is completed call at the open.
On various social media channels, for instance Telegram, BitcoinTalk and Reddit, groups of people close and comply with buy altcoins at a particular price and to sell simultaneously at a selected time when the worth peaks. They often spread false or misleading information to influence unsuspecting investors to shop for during the run-up.
But you’ve got to offer them credit for one thing: they don’t couch their activities with euphemisms.
Just check out the names of the highest five P&D discussion groups on Telegram, consistent with Business Insider:
PumpKing Community (14,317 members)
Crypto4Pumps (7,602 members)
AltTheWay (5,582 members)
Pump.im (148 members)
OCPump (1,281 members)
While this twisted kind of transparency could also be refreshing in comparison to the secretive manipulation of Libor by traders at large banks a decade ago, the prevalence of those groups underscores the hazards facing investors in cryptocurrency.
“This features a negative effect on the general market and simply creates fear, uncertainty and doubt (FUD) within the overall crypto community,” said Oleg Seydak, the CEO of Blackmoon Financial Group, a platform for marketplace lending of cryptocurrency.
“This sort of manipulation unfortunately affects an excellent majority of latest crypto investors and if we would like the industry to prosper, we’d like to figure together to stop and pack up these channels and groups,” he said.
How, though? a method is to encourage whistleblowing.
The Commodity Futures Trading Commission (CFTC), the U.S. agency that regulates derivatives, announced in February that it might pay a bounty to those that come to the fore with information that results in an enforcement action.
Another potential solution may be a self-regulatory organization (SRO) just like the one proposed by by Gemini founders Cameron and Tyler Winklevoss. The concept has the support of CFTC commissioner Brian Quintenz. But it’s unclear whether an SRO would have any teeth.
Until regulators come up with rules to curb P&D scams, investors got to be extra cautious they don’t get taken for a ride.
Psychology is vital behind these scams. Beware as fraudsters are usually masters of persuasion and can tailor their pitches to tap into their targets’ psychological profiles.
Remember, if it sounds too good to be true, it probably is.
Keep your guard up
For an illustration, below may be a screenshot of a P&D group in action, courtesy again of Business Insider. Note the breathless language that tries to maximize FOMO (fear of missing out): a coin’s price is “flying”; it’s “so cheap now.”
Proceed with extra caution around tokens issued from initial coin offerings (ICOs), as some have estimated that perhaps one out of 10 ICOs has used this scheme a minimum of once.
According to a January blog post by Sergey Khorolskiy, when some ICO teams understand that their project is on the brink of failure, they organize a pump and dump. The strategy is simple: Using all kinds of social networks, they start to “shoot” followers with excellent news .
Cryptocurrencies generally are vulnerable to manipulation because, like penny stocks, they’re thinly traded in comparison to mainstream financial assets.
“One investor can drive prices on one exchange by taking an outsized position a method or the opposite , or just by putting out an outsized bid or ask that by itself moves the market,” said Trace Schmeltz, a partner within the Chicago and Washington, D.C. offices of Barnes & Thornburg LLP.
What’s more, “for cryptocurrencies that trade on multiple markets, a trader could potentially move the market globally by moving the worth on one exchange.”
For this reason, investors should be wary of following pricing as reflected on less well-established exchanges, Schmeltz added.
Like it or not, crypto is here to remain . because the market evolves the scammers and fraudsters are going to be weeded out as regulation is enforced. Until then, we will expect there’ll some tears along the way.