The cryptocurrency market is manipulated by a number of dominant traders in some of the major trading venues, causing hundreds of millions of dollars to lose to other players.
Wall Street Journal (WSJ) concluded this in an analysis of the boiling market.
The magazine has reviewed trade data and communication between traders between January and July and identified 175 pump and pump schemes in a total of 121 different digital currencies.
“Pump and dump” is a classical way of manipulating markets, for example for equities, by buying securities in usually smaller companies at low levels, then “tweaking up” the prices by marketing on different stock forums. Once the have risen, they sell the security to bring home profits. Losers are those who have not been in the first place, but jumped in on the train at a later stage based on questionable data. The procedure is illegal and is being conducted continuously by the authorities.
“The trading venues for cryptocurrencies are unregulated, so the type of trade prohibited on, for example, the New York Stock Exchange can be carried out unpunished,” commented Ben Yates, lawyer at RPC, for WSJ.
The “pump” part of the business is often conducted in chat rooms like Big Pump Signal, a chat on the Russian message app, Telegram, with 74,000 followers. The group’s moderator is anonymous, it is unclear who is behind the business, and any spokeswoman does not want to come forward, says the newspaper.
Membership in the groups often costs in the range of 50-250 dollars, and / or requires participants to market the group to gain access to trading information.
This type of business has become increasingly intense in line with the increased number of so-called Initial Coin Offerings (ICO) that is being made to fund various projects. Such ICOs attracted about $ 20 billion, SEK 160 billion over the past 18 months, compared with approximately 300 million in 2014-2016.
The strategy for “pumping” is simple. In the chat room, the date of purchase begins to begin, and then the traders start to act to give the impression of high demand, after which a number of smaller players enter the game. At that stage, leaders quickly get out and lock in profits. The whole process can be over in a few minutes.
Wall Street Journal has identified 63 groups actively promoting different pump and dump solutions. Most often, there are smaller cryptocurrencies that are goals for the performances, such as Pesetacoin, Stealth, and Agrello. Target currencies should be large enough for meaningful trading, but at the same time small enough to manipulate and at a price level that can attract many smaller players.
The business can be compared to the type of boiler rooms that occurred during the dotcom bubble, writes WSJ and exemplifies Jordan’s “The Wolf of Wall Street” Belfort, which acknowledged his role in running pump and dump schemes on 34 companies and cost investors over $ 200 million.