The surge of interest in cryptocurrencies has been accompanied by a proliferation of fraud, largely in the form of pump and dump schemes. This column provides the first measure of the scope of such schemes across cryptocurrencies. The results suggest that the phenomenon is widespread and often quite profitable, and highlight the need for concerted efforts from industry and regulators to fight cryptocurrency price manipulation.





By JT Hamrick, Farhang Rouhi, Arghya Mukherjee, Amir Feder, Neil Gandal, Tyler Moore and Marie Vasek*





The
digital currency bitcoin (BTC) was introduced in 2009. Bitcoin and the
many other digital currencies are primarily online currencies. The key
currencies are those based primarily on cryptography. Bitcoin is the
leading cryptocurrency, but there are nearly 2000 others.-





Bitcoin has
experienced a meteoric rise in popularity since its introduction. Its
success has inspired scores of competing cryptocurrencies that follow a
similar design. Bitcoin and most other cryptocurrencies do not require a
central authority to validate and settle transactions. Instead, they
use cryptography (and an internal incentive system) to control
transactions and manage the supply. A decentralised network validates
transactions. Once confirmed, all transactions are stored digitally and
recorded in a public ‘blockchain,’ which can be thought of as a
distributed accounting system.





The proliferation of
cryptocurrencies and changes in technology have made it easier to
conduct ‘pump and dump’ schemes. Many of the cryptocurrencies available
today are illiquid and are characterised by very low trading volumes on
most days, with occasional volume and price spikes.-





Cryptocurrencies
have only recently become a subject of research in economics, but the
topic has been of interest for longer in computer science (for early
work on incentives by computer scientists, see Babaioff et al. 2012 and
Eyal and Sirer 2014). Numerous researchers have conducted studies in
order to document and combat threats such as Ponzi schemes, money
laundering, mining botnets, and the theft of cryptocurrency wallets. Ron
and Shamir (2013) attempt to identify suspicious trading activity by
building a graph of bitcoin transactions found in the public ledger.-





In the case of
economics research, Gandal et al. (2018), showed that the first time
bitcoin reached an exchange rate of more than $1,000, the meteoric rise
was likely driven by fraud in the form of fraudulent trading activity.
Griffin and Shams (2018) found that tether, a digital cryptocurrency
that is pegged to the US dollar, likely led to a significant fraction of
the increase in the price of bitcoin and other cryptocurrency prices
during the meteoric rise in cryptocurrency valuations in 2017.





In our recent work
on cryptocurrency pump and dump schemes (Hamrick et al. 2018), we
quantify the scope of these schemes on Discord and Telegram, two widely
popular group messaging platforms with 130 million users and 200 million
users, respectively. Both platforms can handle large groups with
thousands of users, and they are the most popular outlets for pump and
dump schemes involving cryptocurrencies.-





Technologies like
Telegram and Discord allow people to easily coordinate such schemes.
Telegram is a cloud-based instant messaging service using voice over
internet protocol (VoIP). Users can send messages and exchange photos,
videos, stickers, audio, and files of any type. Messages can be sent to
other users individually or to groups of up to 100,000 members. As of
March 2018, Telegram had 200 million active users. Discord, first
released in 2015, has similar capabilities and 130 million users as of
May 2018. Discord and Telegram are primary sources for cryptocurrency
pumps and have been used for pump and dump schemes on a large scale.
Perhaps because of the regulatory vacuum, many of the pump groups do not
hide their goals.





We identified 3,767
different pump signals advertised on Telegram and another 1,051
different pump signals advertised on Discord during a six-month period
in 2018. The schemes promoted more than 300 cryptocurrencies. These
comprehensive data provide the first measure of the scope of pump and
dump schemes across cryptocurrencies and suggest that this phenomenon is
widespread and often quite profitable.-





The data collection
required for the analysis was substantial. Pump data were gathered by
collecting messages posted to hundreds of dedicated Discord and Telegram
channels using their APIs and manually labelling messages that
signalled pumps.-





We also collected
price data on nearly 2,000 coins across 220 cryptocurrency trading
exchanges from Coinmarketcap.com, the leading website of aggregated data
on cryptocurrency trading, during the six-month period from January to
July 2018. This gave us a total of 316,244,976 price data points across
all of the coins listed. The data collected are at the finest
granularity presented by Coinmarketcap.com at the time of collection,
that is, five-minute intervals. We then matched the extracted pump
signals announced on Discord and Telegram with the trading data.





We next measured the
‘success’ of the schemes, which we define to be the percentage increase
in the price following a pump. Ten percent of the pumps on Telegram
(Discord) increased the price by more than 18% (12%) in just five
minutes. Recall that the January–July 2018 period was a period in which
cryptocurrency prices and trading volume were falling significantly.
Hence, such percentage increases were ‘achievements’ for the pump
schemes.





Finally, we examined
what factors explained the ability to increase price. The most
important variable in explaining success of the pump is the ranking of
the coin, where ranking is based on market capitalisation (which is
highly correlated with trading volume). Coins with lower market
capitalisation typically have lower average trading volume. Lower
average volume gives the pump scheme a greater likelihood of success.-





We found that pumps
using obscure coins with low market capitalisation were much more
profitable than pumping the dominant coins in the ecosystem – the median
price increase was 3.5% (4.8%) for pumps on Discord (Telegram) using
the top 75 coins; it was 23% (19%) on Discord (Telegram) for coins
ranked over 500. (bitcoin is the top ranked coin and has rank #1.) We
discuss the effect of other variables on the ‘success’ of the pumps in
our paper.





Three other
(essentially) concurrent papers also examine pump and dump schemes on
cryptocurrencies, but with a different emphasis. Kamps and Kleinberg
(2018) use market data to identify suspected pump and dumps based on
sudden price and volume spikes. They evaluate the accuracy of their
predictions using a small sample of manually identified pump signals. Xu
and Livshits (2018) use data on roughly 200 pump signals to build a
model to predict which coins will be pumped. Their model distinguishes
between highly successful pumps and all other trading activity on the
exchange. Li et al. (2018) use a differences-in-differences model to
show that pump and dumps lower the trading price of affected coins.1





Our work is
different from the other concurrent work in several important ways.
First, we have collected as many pump signals as possible from channels
on Discord and Telegram. We also evaluate them all, without restricting
ourselves to the successful pumps. Second, we investigate reported pumps
for all coins with public trading data, not only those taking place at
selected exchanges. This enables us to incorporate ecosystem-wide
explanatory variables such as the number of exchanges on which a coin is
traded in order to assess what makes a pump and dump scheme successful.





Why should we care
about pump and dump schemes in cryptocurrencies? Recent trends indicate
that bitcoin is becoming an important asset in the financial system.
Further, trading in cryptocurrency assets has exploded as the market
capitalisation of cryptocurrencies grew stunningly in the past few
years. In February 2014, the market capitalisation of all
cryptocurrencies was approximately $14 billion. As of February 2018, the
total market capitalisation was approximately $414 billion, before
falling back to $122 billion in December 2018. Bitcoin itself reached a
peak of more than $19,000 before plummeting over the next few months to
$6,000. Currently (as at mid-December 2018), the bitcoin price is close
to $4,000.





In February 2018,
there were more than 300 cryptocurrencies with market capitalisations
between $1 million and $100 million. In January 2014, there were fewer
than 30 coins with market capitalisations between $1 million and $100
million. The markets for such cryptocurrencies are very thin and subject
to manipulation.-





As mainstream finance invests in cryptocurrency assets, it is important to understand how susceptible cryptocurrency markets are to manipulation. We have provided the first measure of the widespread scope of pump and dump schemes. We encourage the nascent cryptocurrency industry, regulators, and researchers to work together to try to eliminate manipulation in cryptocurrency assets. 





*About the authors:





JT Hamrick, Research Assistant, University of TulsaFarhang Rouhi, Undergraduate student, University of New Mexico





Arghya Mukherjee,Research Assistant, The University of Tulsa





Amir Feder,PhD student, Technion





Neil Gandal,Professor of Economics Berglas School of Economics Tel Aviv University





Tyler Moore,Tandy Assistant Professor of Cyber Security and Information Assurance, University of Tulsa





Marie Vasek,Assistant Professor, University of New Mexico





References:





Babaioff, M, S Dobzinski, S Oren and A Zohar (2012), “On bitcoin and red balloons,” Proceedings of the 13th ACM Conference on Electronic Commerce 2012: 56-73.





Eyal, I and E Sirer
(2014), “Majority is not enough: Bitcoin mining is vulnerable,”
Eighteenth International Conference on Financial Cryptography and Data
Security 2014.





Gandal, N, J Hamrick, T Moore and T Oberman (2018), “Price manipulation in the Bitcoin ecosystem,” Journal of Monetary Economics 95: 86–96.





Griffin, J and A Shams (2018), “Is bitcoin really untethered?”.





Hamrick, J, F Rouhi, A Mukherjee, A Feder, N Gandal, T Moore and M Vasek (2018), “The economics of cryptocurrency pump and dump schemes”.





Kamps, J and B Kleinberg (2018), “To the moon: defining and detecting cryptocurrency pump-and-dumps,” Crime Science 7(1): 18.





Li, T, D Shin and B Wang (2018), “Cryptocurrency pump-and-dump schemes”.-





Ron, D and A Shamir (2013), “Quantitative analysis of the full Bitcoin transaction graph,” in Financial Cryptography and Data Security, volume 7859 of Lecture Notes in Computer Science: 6–24.-





Xu, J and B Livshits (2018), “The anatomy of a cryptocurrency pump-and-dump scheme”.





Yuxing Huang, D, H
Dharmdasani, S Meiklejohn, V Dave, C Grier, D McCoy, S Savage, N Weaver,
A Snoeren and K Levchenko (2014), “Botcoin: Monetizing stolen cycles,”
in Proceedings of the Network and Distributed System Security Symposium.





Endnotes:





[1] There have been
media articles about the pump and dump phenomenon as well. Mac reported
on pumpand dump schemes in a Buzzfeed article published in January 2018,
available here.This was followed by work by Shifflet and Vigna in a- Wall Street Journal article published in August 2018,- available- here.




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