Researchers Find Hundreds of Pump and Dump Scams, Develop Algorithm

An analysis performed by researchers at Imperial College London has found that around $7 million worth of cryptocurrency trading volumes are the result of pump and dump schemes.

Four seconds

According to MIT Technology Review, Jiahua Xu and Benjamin Livshits found that there are on average two such schemes every day in the cryptocurrency market.

They looked at one event which occurred on the 14th of November 2018. After scanning Telegram chat groups, which is where investors are typically notified that a pump operation is imminent, the researchers understood that the action was to commence at exactly 19:30 GMT. Four seconds into that minute, a group called ‘Official McAfee Pump Signals’, which has around 12,000 members, revealed that an almost worthless cryptocurrency called BVP was the target.

The first order was placed within a single second of the announcement, and the coin reached peak value 18 seconds later. After three and a half minutes, it was all over – the cryptocurrency was worth less than it was at 19:29.

They can’t see you if you don’t move

A pump and dump is a standard financial scam. It involves people with prior knowledge of the matter working together to buy lots of a certain asset, which drives up the price. Investors are excitable animals, and, attracted by the sudden movement, inevitably start buying it too. However the original pumpers are the only ones selling. Thus, they make a profit, and the later buyers are left holding a worthless asset.

Moreover, the instigators might have already purchased large amounts of the asset, giving them a massive head start. Insider trading is considered a serious crime -because it gives people the opportunity to make huge profits by cheating others.

In the worlds of electronic trading and cryptocurrency, the difference between a profit and a loss can be a matter of milliseconds. Xu and Livshits found that a different Telegram group announced the pump 21 seconds after Official McAfee Pump Signals – the poor souls in that group never stood a chance.

Between July and November, the researchers studied 236 such events, which were often preceded by someone buying large amounts of the pumped asset. They said: “The study reveals that pump-and-dump organizers can easily use their insider information to take extra gain at the sacrifice of fellow pumpers.”

The research was reported in the context of finding a solution to the problem; Xu and Livshits claim to have developed an algorithm that can predict these scams by monitoring for unusual buying activity of a low-price cryptocurrency.

John McAfee

It would be unfair to say that the name ‘McAfee’ is synonymous with pump and dump schemes, but the eccentric computer programmer-turned-cryptocurrency evangelist has been implicated in a few. In December 2017 he announced that he would be promoting new coins on a regular basis, which naturally seemed suspicious to some, and in October 2018 he was implicated in a suit opened by the US Securities and Exchange Commission against an investment firm called MGT Capital Investments, of which McAfee was once CEO.

It should be noted that there is no indication that John McAfee is connected with the aforementioned Telegram group.