According to a study published by the Wall Street Journal, a number of cryptocurrency investing groups are responsible for the price manipulation of some cryptocurrencies. The cryptocurrency investing groups collaborate via Telegram, a messaging service, operating ‘pump and dump’ schemes.
Cryptocurrency investing scheme – pump and dump
The pump and dump is a common tactic by market scammers where the price is artificially pumped up, and then a number of insiders sell the coin at a high. It is often seen in the ICO market as well as being a common feature in corporate stocks, where executives can be observed selling stocks simultaneously. However, it is much rarer and more difficult to accomplish in the stock market.
The cryptocurrency investing groups first identify a date, time and exchange for the pump and dump. The exchange chosen will typically be one where the asset is cheapest, as there can be considerable differences in digital currencies on exchanges, compared to traditional stock and currency markets. Then, the hype is distributed, where the coin is ‘pumped’.
The way that traders work is off signals/indicators, so when they see signs that a particular asset is rising, they want to ride the wave, capitalizing on a trend. This creates a snowball effect when the price keeps rising and rising. Until the sell signal, when the coin is ‘dumped’ a few minutes or hours later.
The WSJ report
The pump and dump groups charge a monthly fee between $50 and $250. While some traders make money in these well-thought out and professional schemes, most new investors are scammed, being no more than pawns of the more experienced traders. They are incentivized to keep buying until the digital asset reaches a certain point.
Meanwhile, the ringleaders will sell at a point that is below the price given to the ‘outsiders’ to ensure they can make a profit. One trader communicated to the WSJ that he lost $5,000 in 30 seconds. But given that these traders are undertaking a criminal activity, they cannot engender too much sympathy.
The WSJ estimates that over USD 825 million has been lost in the past six months due to these schemes, undertaken by select cryptocurrency investing groups. It could be viewed as centralization of a different kind. When a large number of people get together in the form of social crypto trading groups, they may have enough power to actively manipulate prices leveraging their collective power. Over 175 such groups are said to have been identified.
Price manipulation is nothing new, and the CFTC is currently investigating BTC price fixing. The tether stablecoin has also come under scrutiny, and the price of BTC started its decline from all-time highs on the exact date that BTC futures were launched on US exchanges.
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Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.