WSJ: At least $825m of crypto pump and dump schemes in 6 months

The Wall Street Journal has found hundreds of groups, coins and millions of dollars involved in the scam.

Analysis from The Wall Street Journal (WSJ) has identified at least $825 million of cryptocurrency pump and dump trading activity over the last 6 months, from 175 different pump and dump schemes across 121 different cryptocurrencies.

Over the course of these scams, they pulled in hundreds of millions of dollars from those on the wrong side of the fence.

"I instantly lost $5,000 in about 30 seconds," said Taylor Caudle, the victim of one such scheme, in an email to the WSJ. He said he got roped in to a group called Big Pump, and bought the DigixDAO coin in January on the instructions of the pump operator and maxed out a credit card in the process, but said that less than a minute after placing the order, the price dropped sharply and never recovered.

Note: Something doesn't quite add up here. DigixDAO prices appear to have stayed above their January prices until May.

Those irregularities aside, Caudle's experience might be similar to many. Pump and dump groups are only profitable as far as they can find buyers, and increasingly wary cryptocurrency users tend to be leery of chasing obvious pumps. As such, they often work by turning participants into victims, and choosing coins that itchy-fingered bystanders might have a reason to believe would suddenly jump.

Larger pump and dump groups have several circles, with an anonymous inner circle of planners being the only ones who know what's going to be pumped when. Everyone else is just responding to their instructions, and trying to get in as soon as possible and out as profitably as possible. Those in the inner circles get the signals the soonest while those in the outer circles will get them the latest.

These signals typically take the form of instructions to buy and a target price at which to start selling.

It "incentivises the poor followers to keep buying until the price is reached, which it often never does," Caudle says.

The end result is that the slowpokes on the outer circles are unknowingly buying the coins being sold by those on the inner circle, and then getting caught with no one else to sell them to.

Participants alone can't prop up the prices too far though, and pump groups will often choose coins where there's enough trading activity to attract a broad set of interest, but still little enough for a pump to meaningfully impact the price.

Larger groups with more money in the pump are therefore able to land bigger and more profitable fish.

"It's a gambling thing, and they’re addicted to it," said Dave Jevans, CEO of cryptocurrency analytics firm CipherTrace to the WSJ. "All of them buy in the frenzy with the intention of taking a profit and selling before the dump, sort of like a game of crypto chicken: the longer they wait for prices to peak the more money they can make, but the risk of losing everything is heightened by the inevitable crash."

The WSJ identified 175 seemingly different pump groups, but functionally there are probably far fewer. The ever-present need for more victims, and the tendency for pump groups to run out of victims and get a bad reputation for "pre-pumps" (operators buying up coins in the days and weeks before a pump), means existing inner circles will often create multiple pump groups and then get them all to unknowingly participate in the same pump. Other times, each pump group might more transparently be just a differently named circle of the same wider pump and dump.

Pumping and dumping schemes like this are illegal, but only in the context of market manipulation. ICO pump and dumps, where people "pump" in the ICO and then "dump" when a coin hits the secondary markets are common, and statistically more profitable than investing long term.

Regulations in certain countries have yet to catch up in the ICO space though and paradoxically tend to favour the dumpers by restricting ICO "pump" participation to moneyed institutional traders and "dump" secondary markets to mainstream speculators.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

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