Level of cryptocurrency scams 'unprecedented in modern markets'

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·4-min read
POLAND - 2020/03/13: In this photo illustration a Bitcoin cryptocurrency logo seen displayed on a smartphone. Stock market prices in the background as stock markets tumble all over the world. (Photo by Filip Radwanski/SOPA Images/LightRocket via Getty Images)
A Bitcoin cryptocurrency logo seen displayed on a smartphone. Photo: Filip Radwanski/SOPA Images/LightRocket via Getty Images

Cryptocurrency markets remain a scammers paradise, according to new research.

Academics at the University of Technology Sydney and the Stockholm School of Economics in Riga found boiler room-style scams are rife and generate millions of dollars of suspicious trading volume each month.

Researchers found 355 incidents of price manipulation across several cryptocurrency exchanges over a period of just seven months. $350m (£267m) of suspicious trading activity was linked to “pump and dump” scams that reaped an estimated profit of $6m for organisers.

The paper, published this week, concluded that the level of price manipulation in cryptocurrency is “unprecedented in modern markets.”

“If you compare the scale of manipulation to traditional equity markets, it’s exponentially higher,” Anirudh Dhawan, one of the paper’s authors, told Yahoo Finance UK.

“Even in the penny stocks, OTC equity markets, you’ve got a few hundred cases in a 10 year period. Here you’ve got more than 300 cases in the space of a few months.”

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The academics focused on “pump and dump” scams, where organisers try and artificially inflate the price of assets they hold by convincing other people to buy them. The rush of demand pushes up the price — the pump — and allows the scammer to sell their holdings at a profit — the dump — before the price crashes back down to earth.

“Pump and dump” scams form the core part of stock market thrillers like the Wolf of Wall Street and 2000’s Boiler Room. Jordan Belfort, the real-life inspiration for the Wolf of Wall Street, was sentenced to four years in jail for his role running a “pump and dump” stock scam.

GOLD COAST, AUSTRALIA - JUNE 1:  (EUROPE AND AUSTRALASIA OUT) Motivational speaker Jordan Belfort speaks on 'The Art of Prospecting' at a real estate agents' conference at the Gold Coast Convention Centre on June 1, 2014 on the Gold Coast, Australia. (Photo by Jono Searle/Newspix/Getty Images)
Jordan Belfort, the real-life inspiration for the Wolf of Wall Street. Photo: Jono Searle/Newspix/Getty Images

Unlike stock market scammers, cryptocurrency pump and dumpers make no bones about what they are doing.

“Manipulators make no pretence of having private information or claiming that a coin is undervalued, unlike typical stock market manipulations,” researchers wrote in the paper. “Instead, pump group administrators (manipulators) publicly declare that they are pumping a given coin (releasing a “pump signal”) and call on others to join.”

Pumps are organised and clearly advertised on chat networks like Discord and Telegram. The groups researchers looked at had 23 million members between them.

“I suspect there’s a lot of attrition,” Dhawan said. “People might try it out once, twice if they see themselves failing they might stop.”

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While names like bitcoin and ethereum dominate coverage of the cryptocurrency space, price manipulation occurs with smaller coins. There are over 6,000 cryptocurrencies in circulation, according to CoinMarketCap.com, with huge variations in market capitalisation and liquidity.

“You have a large number of coins that you can essentially play trading games with,” Dhawan said.

15% of all the nearly 200 cryptocurrencies Dhawan and his co-author Tālis J. Putniņš looked at were manipulated at least once during the seven month period they observed.

Despite the fact those driving up prices will likely lose money, people still take part. The paper concludes that participants are not motivated by rational reasons and instead take part due to overconfidence or a desire to gamble. Pumpers think they can time it right and sell-out before the crash, or simply like the thrill of gambling on the ups and downs of the price movement.

While pump and dump scams are illegal in the stock market, the world of cryptocurrencies is largely unregulated and those behind the schemes are not technically breaking any laws. The academics argue regulators and exchanges should crackdown on “pump and dump” scams.

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“Obviously regulators can take more active steps to get rid of this kind of manipulation,” Dhawan said.

“Exchanges can take more active steps. It’s fairly easy for exchanges to actually prevent this kind of activity. They can observe abnormal price movements on their exchange — this is what happens in normal stock markets.”

“Pump and dump” scams first came to light 2017 but little has been done to clamp down on them since then. The academics argue the lack of action is holding back the development of the cryptocurrency market. US regulators have repeatedly cited fears of manipulation as a reason for not approving bitcoin ETFs that could be easily purchased by regular investors.

Dhawan said operators of crypto exchanges where scams are prevalent may not want to stamp out the wrongdoing.

“The $350m, obviously some portion of that is pocketed by exchanges as trading commissions,” he said. “If they can have gamblers and overconfident actors sticking to their platform and repeatedly putting in money to these schemes, then that’s commission for them right?

“I still am quite bullish on cryptocurrencies,” Dhawan said. “I think they have a lot of potential benefits that we can reap from them.”

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