The infamous pump and dump. We know it goes on and we know why people do it, sometimes though, the impact of a prolonged pump and dump scheme can be quite hard to measure.
For those not familiar with the terminology, here’s a quick definition from Investopedia.
“Pump and dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. Pump and dump schemes were traditionally done through cold calling. With the advent of the internet, this illegal practice has become even more prevalent.”
“The schemer can get the action going by buying heavily into a stock that trades on low volume, which usually pumps up the price. The price action induces other investors to buy heavily, pumping the share price even higher. At any point when the schemer feels the buying pressure is ready to fall off, he can dump his shares for a big profit.”
These schemes can be carried out in large groups, containing many people who are working together to boost the price of a cryptocurrency that is trading on a low volume, in order to encourage further external buy ins. These people can then sell off in unison, which means the price will fall and the people involved in the scheme will see a greater profit. This in turn, is price manipulation and is very problematic for a number of reasons.
According to Sludgefeed, The Wall Street Journal have carried out an investigation into such schemes that have impacted altcoins over the past 6 months. Their findings indicate that in total, price changes through manipulation have caused a total change of $825 million. This has been caused by 175 individual groups, across 121 altcoins between the months of January 2018 and July 2018.
According to Sludgefeed, The World Street Journal have found a significant impact from one major group, by the name of Big Pump Group:
“The Journal has identified “Big Pump Signal” as the largest pump group. After the launch of their chatroom on Telegram late last year, the group has promoted 26 pump operations that eventually saw $222 million in trades. The group currently has 74,000 followers on Telegram and has reached “capacity” on Discord. In early July, Big Pump Signal urged followers to begin purchasing CloakCoin(CLOAK), an obscure coin that was created for untraceable transactions, on Binance. The anonymous moderator noted, “@everyone be sure to ride the waves!” on the group’s Telegram. The buying occurred immediately, which saw the price of CloakCoin climb 50% to $5.77 before ultimately dropping almost a dollar after two minutes.”
See more for yourself, here.
Market manipulation does have a wider impact on the whole market and thus, this is bad news. The $825 million figure isn’t an exact sum, but it indicates very well just how powerful these schemes are and how much of a price change they can accumulate in the process. Moreover, this unfairly encourages traders to buy into something that seems to be growing. An innocent trader could benefit from such schemes but this is unlikely, as they aren’t aware of when the sell off will occur, so often miss out on the best price.
Until the markets become less volatile, pump and dump schemes will continue to be a problem. Therefore, this is yet another black mark on the ever growing list of reasons to put people off cryptocurrency adoption, i’m afraid.