How Cryptocurrency Pump-and-Dump Scams Work

Several news stories have hinted or provided anonymous accounts of schemes to manipulate cryptocurrency trading through pump-and-dump schemes. A recent report by the Wall Street Journal provides definitive proof. The report provides an inside look at the operations of pump-and-dump schemes. The Journal states that crypto pump-and-dump schemes accounted for $825 million in trading activity over the last six months and “hundreds of millions of dollars in losses”. During the period from January till the end of July, there were 125 pump-and-dump operations and they manipulated prices of 121 different coins. (See also: How Does A Pump And Dump Scam Work?)

How Do Pump-and-Dump Schemes Work?   

According to the Journal, crypto pump-and-dump schemes operate in a fashion reminiscent of the early days of the stock market. During that time, a group of traders wreaked havoc in the markets by manipulating prices through purchasing in groups.  

A similar dynamic exists in cryptocurrency markets. A horde of traders drum up enthusiasm for a coin by evangelizing it on multiple channels, including social media. Subsequently, they instigate a coordinated purchasing frenzy for it. As the coin’s price climbs, other traders, unconnected to the pump-and-dump group, also latch onto the buying spree, further boosting its price. The coordinated action is repeated, except this time around in selling the coin, when it reaches a certain price target. This causes a sharp decline in its price. While the pump-and-dump group makes profits, other traders, who purchased the coin based on false promises, are left holding losses. (See also: Former Paypal CEO Calls Bitcoin A Scam). 

The favored medium of communication for traders involved in pump-and-dump are messaging apps Telegram and Discord. Traders form groups on both platforms. Such groups charge between $50 to $250 for membership. In some cases, traders can choose to evangelize the service to others and become a member. Binance, a Hong Kong-based cryptocurrency exchange, is a favorite for such operations because it lists small coins with low liquidity that makes them ideal candidates for manipulation. 

Not all traders in the scheme make money, however. The Journal article provides the example of a San Diego-based trader Taylor Caudle, who lost $5,000 in 30 seconds. He had placed a buy order for DigixDAO that was listed on Binance. Its prices dropped and did not recover. According to Caudle, such schemes “incentivize the poor followers to keep buying until the [target] price is reached, which it often never does.”

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