WHAT IS A PUMP AND DUMP SCHEME?
Pump and Dump is an illegal scheme designed to inflate the prices of a stock or an asset. Perpetrators use misleading or false statements to increase the price of their companies stock well beyond the normal baseline. Ordinary people will see the increased price as a sign of interest in the stock and will buy high hoping for good returns. The perpetrators will then all sell their shares at once causing the prices to crash. Analogous practices are highly illegal in regulated markets, but cryptocurrency markets are currently unregulated.
Thanks to modern platforms such as Telegram and Discord, it is becoming easier and easier for comparable activities to be kept hidden. These chat apps, along with many others, have rather sophisticated encryption technology. An individual who designates themselves as the “pump organizer” will create an encrypted channel on one of these apps and recruit as many members as possible. When their numbers are adequate, usually over 1,000 members, they make an announcement as to exactly what time down to the exact minute the dump will occur.
Over the course of a few minutes everyone in the group will buy up tons of whatever coin they are planning to use. The price will rapidly inflate, then a few minutes later, as soon as the price starts to dip everyone in the group will panic sell, which causes the starting coin price to crash back down to its starting point and sometimes even lower.
It can be extremely difficult to stop this kind of thing from occurring without the help of machine learning algorithms. We will explore this possibility in a later section.
THE CRYPTOCURRENCY MARKET
A recent study conducted in 2018 took a look at pump and dump schemes in the cryptocurrency market. Researchers identified more than 3,700 pump messages and signals advertised on two popular cryptocurrency messaging boards between January and July 2018, urging investors to buy specific coins.
Because of the huge surge Bitcoin experienced last year more and more people are jumping into the market without adequately researching these assets for themselves. This makes for a high number of prime targets of these schemes. Combine that with the fact, that the crypto market is unregulated and you have a recipe for a lot of money to be lost. It seems AI technology will have to come to the rescue once again to ensure that these shady actions are stopped.
PREDICTING THESE SCHEMES WITH MACHINE LEARNING
Academics from the Imperial College London have successfully used machine learning to predict pumps with an over 80 percent accuracy rate. These researchers have analyzed over 300 Telegram channels and identified over 220 ‘pump events’ that they used to create their model. Here is an example of the Yobit exchange organizing a pump and dump highlighted by the researchers.
Some say that Yobit is a scam. The jury is still out on this one.
One example that was highlighted by the researchers was that of a coin called ‘BVB’ which hasn’t even been active since 2016 which is a dead giveaway that it was only created specifically for these schemes. People started buying the coin at $0.0014 before it peaked at $0.0045 offering a rather high profit if you had enough money in it. The coin traded at less than its original value a mere 3 and a half minutes later.
The researchers estimate that pump and dump schemes account for nearly $7 million dollars of monthly cryptocurrency trading volume. With a current 24 hour volume of $15.9 billion, that still only represents 0.0438 percent of the market. Nevertheless, as more people get involved in the crypto market problems of this magnitude will only multiply.
Researchers were able to make their predictions in part by gathering a lot of data on each coin including past trends related to their prices. Machine learning algorithms analyze the current fluctuations in coin price and can prove beyond a reasonable doubt that certain exchanges are organizing a schemes of this nature and provide a warning to investors before they lost their money.
Eventually legitimate exchanges will be able to provide advanced warnings about these schemes ahead of time which will stop them from happening as organizers will be unable to profit much from them without tons of people inflating the price of the coins. A full analysis of the researchers findings can be viewed here.