A fresh report from the Wall Street Journal takes a look at alleged cryptocurrency pump and dump schemes. This sort of price manipulation is said to have generated a staggering $825 million in trading activity over the last six months.
The WSJ is said to have identified a whopping 175 different pump and dump schemes, affecting 121 digital currencies, taking place between January and July of this year.
More specifically, pump-and-dump schemes are a relatively common method of market fraud. It involves traders who buy assets, and then intentionally hype and talk up the price of these specific assets, before then selling it for a profit at this inflated price.
In essence, pump-and-dump schemers profit from the loss of fooled investors, who erroneously invest in the asset at a high, non-justified price. These fooled investors are then often left with shares whose value has plummeted.
While pump and dump schemes concerning publicly traded stock are often brought to court by the US Securities and Exchange Commission, the regulator has so far never done this for a pump-and-dump scheme involving cryptocurrencies.
Ben Yates, a commercial disputes lawyer specializing in cyber law and fintech at the London-based law firm RPC, was quoted as saying that this might be the case due to the lack of regulation concerning cryptocurrencies.
”Cryptocurrency exchanges are unregulated markets, so the kind of market manipulation based on, say, the New York Stock exchange can essentially be carried out with impunity”.
According to the Wall Street Journal report, the messaging application Telegram plays a crucial part in orchestrating pump and dump operations. One Telegram chatroom which the WSJ examined was ”Big Pump Signal”, which has more than 74,000 followers.
The WSJ goes on to note that Big Pump Signal is to have promoted a total of 26 pump operations, which collectively saw $222 million in trades.
Nonetheless, the WSJ piece also states that this is merely the tip of the iceberg – many similar groups exist, which may be responsible for countless millions more in trading activity. However, these mainly coordinate their efforts in private chatrooms which cannot be accessed without an invitation.
In addition to this, the risk for pump and dump schemes are said to be higher due to the increase in the volume of funds associated with ICOs. The WSJ article recounts how pump and dump groups announce a set date, time and cryptocurrency exchange for a specific ”pump”.
The coin being pumped is then announced at the set time, and investors start buying the chosen asset. Pumpers then wait for the price of the asset to peak before selling, or dumping, it.
However, the longer they wait, the more money they can potentially make, but the risk of missing the asset’s peak price and instead lose money also increases.
Pump-and-dump schemes were outlawed in the 1930s, and one more recent example of such schemes were the ones run by Jordan Belford – the ”Wolf of Wall Street” – during the dot-com bubble.
If Ben Yates of RPC is indeed accurate in indicating that lack of cryptocurrency regulation might be the driving force behind cryptocurrency pump and dumps, this is just one more reason for authorities around the world to fast-track cryptocurrency regulation – something South Korea’s financial regulator recently called for.
Image Source: “Flickr”
Rasmus Pihl is a writer for Toshi Times by day and an avid follower of the blockchain industry by night. Rasmus holds a Bachelor’s Degree in Marketing from the Gothenburg School of Business, Economics, and Law and runs a Swedish marketing consulting firm. Moreover, when he isn’t writing for Toshi Times, traveling, working or changing the world in some other capacity, Rasmus is more than likely caught up in postgraduate studies.