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There are “pump-and-dump” manipulations in cryptocurrencies. The issue is actually widespread. In just the first 7 months of 2020, two academic have documented and studied over 350 such cases.<\/p>\nThere are “pump-and-dump” manipulations in cryptocurrencies. The issue is actually widespread. In just the first 7 months of 2020, two academic have documented and studied over 350 such cases.<\/p>\n
Cryptocurrency pump-and-dumps differ from the old one: they are brazen, fast, executed by groups of actors. The organizers front run their groups, making great returns for themselves. The rest of the participants lose money on average, but keep on participating.<\/p>\n
Academics are focusing on the topic. Here is the current state of the art.<\/p>\n
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On February 6th, 2018, Christopher Giancarlo, the Chairman of the CFTC, testified in front of the Senate’s Banking Committee. His opening statement<\/a> explained the role of the CFTC in regulating crypto currencies. He reminded us all of their benefits, but also of their potential dangers, notably manipulation. A specific note<\/a> focusing solely on pump-and-dumps events is actually available on the CFTC’s website. This short document explains how manipulators work in online groups. The organizers inform group members of the next manipulation event in public chats:<\/p>\n The Wall Street Journal reported on the issue<\/a> in August 2018, and had identified 175 such operations. Explanations:<\/p>\n <\/p>\n Multiple academic articles have started analyzing this phenomenon. The most recent is A new wolf in town? Pump-and-dump manipulation in cryptocurrency markets<\/a>, by Anirudh Dhawan<\/a> (University of Technology Sydney) and T\u0101lis J. Putni\u0146\u0161<\/a> (Stockholm School of Economics in Riga). They have reviewed hundreds of crypto currency manipulations, and analyzed the motivations of the participants.<\/p>\n Pump-and-dump manipulations in cryptocurrencies are widespread<\/span> and account for a substantial amount of crypto trading. The authors identified 355 such cases just in the first 7 months of 2020<\/span>, involving millions of participants and generating~$350m of trading.<\/p>\n ~15% of the coins were affected at least once<\/span>.<\/p>\n There are 2 pumps per day on average<\/span>, much higher than in equities at any time.<\/p>\n The organizers pocketed an estimated $6m<\/span> from other participants over the period.<\/p>\n Pumps-and-dumps are short-lived<\/span>. It takes 8 minutes on average for the currency to reach its peak.<\/p>\n The asset then reverts to its original price in hours, at worse a day or two<\/span>.<\/p>\n The volume of trading during the period is typically 13-14 average daily volume<\/span>.<\/p>\n The currency moves are significant: typically 65% in price or four standard daily variation<\/span> (of already volatile assets).<\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n Here are the main contributions of the academic paper.<\/p>\n <\/p>\n Result 1:<\/strong><\/span> Rational individuals with correct beliefs do not participate in cryptocurrency pump-and-dumps.<\/em><\/p>\n <\/p>\n Result 2:<\/strong><\/span> Sufficiently overconfident individuals participate in cryptocurrency pump-and-dumps.<\/em><\/p>\n <\/p>\n Result 3:<\/strong><\/span> Individuals with preferences on cumulative prospects participate in cryptocurrency pump-and-dumps as a form of gambling.<\/em><\/p>\n <\/p>\n Result 4:<\/strong><\/span> Pumps with more participants and pumps in less liquid coins have higher peak prices and earn manipulators higher profits.<\/em><\/p>\n <\/p>\n Result 5:<\/strong><\/span> Pumps with more manipulator participation are less attractive to non-manipulators and therefore have less non-manipulator participation.<\/em><\/p>\n <\/p>\n Result 6:<\/strong><\/span> Non-manipulators are more attracted to pumps in relatively illiquid coins.<\/em><\/p>\n <\/p>\n Result 7:<\/strong><\/span> Participation in pump-and-dumps through time increases when the general level of interest in cryptocurrencies increases, when the returns of past pumps are higher, and when there is an increase in market-wide gambling activity.<\/em><\/p>\n <\/p>\n The interest in cryptocurrencies pumps increases, when the returns of past pumps are higher, and when there is an increase in market-wide gambling activity.<\/p>\n <\/p>\n Gambling is regulated<\/span> so that gamblers are not abusively taken advantage of by gambling services providers. There is no such control in crypto currencies<\/span>.<\/p>\n Unfortunately, the least sophisticated players are also the poorest<\/span>.<\/p>\n Pump-and-dumps harm price accuracy and informativeness of the markets.<\/p>\n You could compare those pump-and-dumps, where the last one in gets hurt, to new micro-Ponzi schemes<\/span> as well.<\/p>\n Widespread pump-and-dumps damage market integrity<\/span>. Financial institutions, which are concerned about their reputations, may chose to not associate themselves with such schemes and digital assets as a result.<\/p>\n Regulators also restrict the growth of crypto assets<\/span> (ETFs) because of the risk of manipulation.<\/p>\n <\/p>\n Hedge funds could probably take advantage of pump-and-dumps<\/span>. They could monitor chat rooms and \/or detect pump names ahead of the crowd. They would have an execution advantage (there are now institutional quality execution platforms).<\/p>\n But following the pump-and-dump direction would generate legal & compliance risk, without even mentioning headline risk.<\/span><\/p>\n On the other hand, they could easily sell the peak of the pump<\/span>. Since the assets reverts in hours typically, it is less likely that you will remain short at the end of the day, so you could buy-back your naked short during the day. Now we need the confirmation that naked sales are possible in cryptos… Borrows are expensive.<\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Pump-and-dump are ubiquitous in crypto currencies. The schemes are well organized online groups, acting for the explicit purpose of manipulating currencies.![\"The](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/The-next-Pump-and-dump-CFTC-article-1024x171.jpg\")
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![\"CloackCoin](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/CloakCoin-July-1st.jpg\")
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The latest academic article<\/h3>\n
A few facts<\/h4>\n
![\"Pump-and-dump](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/Pump-and-dump-pre-annoucement-170x300.jpg\")
There are currently 7,000 cryptocurrencies<\/span>, which have raised ~29 bn of capital in ICOs, and now represent $100 trn of trading volume per year.<\/p>\nThe difference with equity pump-and-dumps<\/h4>\n
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![\"Buy,](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/buyBYE-300x148.png\")
The operation is presented as a game of skills<\/span> to participants – to profit from the operation, one needs to be fast<\/span>, and one shouldn’t be last… Organizers still ask participants to delay their sales, so that all have\u00a0 participants have a chance to win.<\/li>\n<\/ul>\n\n
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About exchanges and enforcement<\/h4>\n
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Crypto exchanges, still in their infancies, have little to no technology to monitor and eliminate those schemes<\/span>. They rarely have anti-fraud policies. None have market surveillance. A couple have rudimentary technology.<\/li>\nThe paper’s contributions<\/h4>\n
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Other pump characteristics<\/h4>\n
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![\"Average](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/Average-pump-return-e1622051334473.jpg\")
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![\"Average](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/Average-pump-volume-e1622051399290.jpg\")
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Welfare implications<\/h4>\n
![\"Welfare](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/Welfare-300x199.jpg\")
Pumps cause wealth transfers from the least to the most sophisticated players<\/span> – manipulators.<\/p>\nConclusion of the conclusion<\/h3>\n
![\"Institutional-investors-pump-and-dump\"](\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/05\/academic-institutions-300x172.jpg\")
Institutional investors will be wary of being associated with such assets<\/span>. They will therefore avoid less liquid assets, hence keeping those in the less liquid area and concentrating liquidity in few coins.<\/span><\/p>\nReferences<\/h4>\n
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\nOrganizers are front-running their groups and make great returns for themselves, so why would other participate? For hubris and gambling fever, say academics.
\nRegulators are absent, and the situation will deteriorate. This is the long-form review of this Far West of modern ages.<\/p>\n","protected":false},"author":1,"featured_media":6269,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[329,12,11,13],"tags":[165,67,157,185,223,224,196,103],"acf":[],"_links":{"self":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/6240"}],"collection":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/comments?post=6240"}],"version-history":[{"count":2,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/6240\/revisions"}],"predecessor-version":[{"id":13166,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/6240\/revisions\/13166"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media\/6269"}],"wp:attachment":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media?parent=6240"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/categories?post=6240"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/tags?post=6240"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}