Pump-and-Dump Schemes: A New Wave of Fraud in the Crypto Space
13.11.2021 • Просмотров:

Pump-and-Dump Schemes: A New Wave of Fraud in the Crypto Space

By Decimal

After the California Gold Rush in 1870, two Kentucky scammers devised a scheme to take advantage of the FOMO (fear of missing out) of greedy financiers. They invented the existence of a large diamond deposit in the West. Investors put millions. Everything was fake.

A story that should prevent us from believing anyone who offers us a get-rich-quick scheme.

After about 150 years, a new generation of amateur investors is also desperately trying not to stay away from the new “great opportunity” offered by the financial world.

After seeing a boom in GameStop shares on sites like Reddit and Discord, hundreds of thousands of naive souls join Discord groups that promise big profits by manipulating cryptocurrency markets – also known as pump and dump schemes.

Step 1. Buy in advance when the currency is cheap.

Step 2: Convince others to join. The more, the better.

Step 3. Sell before the price drops.

“Enter at the right time and you will win,” these groups promise. Losers are left with nothing, and winners with a big bag of coins.

Crypto-pumping (or pumps) has grown significantly in recent years, partly due to the ease of creating and selling a new digital asset. In 2018, the Wall Street Journal identified 175 “pump initiatives” for which more than $825 million was transferred in 121 different currencies, most of which are organized in the Discord and Telegram groups.

Since then, this phenomenon has grown. According to Coinmarketrate.com, today there are more than 13 thousand cryptocurrencies, the volume of trade is growing, especially little-known currencies that have no fundamental value other than investment.

Created as an application for online gaming, Discord has recently become popular for creating financial groups. The app attracted a lot of attention for its role in the WallStreetBets campaign to inflate GameStop in January, when the cost of memes rose from $20 to $347 in a matter of days.

Subsequent analysis attributed most of the growth to large firms rather than individual investors. But the loud resonance of this case made many people think: “If I find myself on the right Discord server at the right time, maybe I can earn some money.”

WallStreetBets users then turned to Dogecoin. It seemed to them that inflating this old and comic coin could be funny. And it worked. The cost of Doge increased from $0.008 at the end of January to $0.68.

Elon Musk and the Coin Push

According to the moderators, several new pump servers and social media accounts appeared simultaneously on four Discord pumping servers, of which at least two dozen used the name and logo of WallStreetBets.

These accounts are not linked to the WallStreetBets subreddit or the official Discord server, according to one of its moderators. (WallStreetBets has only recently started allowing cryptocurrency discussions, but is limited only to Bitcoin, Ethereum and Doge).

However, they have tried to take advantage of the attention given to WallStreetBets by pushing profit targets up to 500%. There were 83,000 participants on one of the servers.

With his tweets, Elon Musk contributed to the massive popularity of the Doge Coin.

“Many young people suddenly became interested in stocks and investments, and this gave cryptocurrencies a huge increase in popularity,” says a Discord user under the name Alejandro.

Alejandro was invited to his first crypto pump server in early February, during the GameStop boom. After receiving what he defined as a “good profit” of 170% of his initial investment, he created his own FairPlay Crypto Pumps group.

It had 10,500 participants who connected every couple of days for a new “pump signal”, a message sent to all server participants announcing which currency they were going to pump and when. According to him, the benefits are brought by people who do not use Discord.

“This principle is known as FOMO (fear of missing out),” he says. “When outsiders see a sudden increase in the price of a currency, they massively go to buy it. And the members of my group will sell them coins in exchange for a significant profit.”

Discord is the perfect tool for these pumps. It is a semi-public forum that allows users to receive notifications about agreed purchases and discuss strategy.

Many moderators of these servers say that they pay people (whom they call “advertisers”) for sending spam to Discord users with invitations, sometimes including the distribution of cryptocurrencies. New participants are greeted with answers to frequently asked questions that describe 2000% pumping, and a chance to win hundreds or thousands of dollars.

What’s really going on

“These Discord groups are like casinos. As they say, “the house always wins,” and they are the house,” says Thomas Hurley, 21, a participant in several crypto pumps at Discord.

After some crypto evangelists started joining his online gaming groups to promote pump groups, he tried to participate in several coordinated pumps. He never made a lot of money. But others earned. When he started analyzing the evolution of these coins on sites like Binance, he discovered some interesting patterns.

“A few seconds after they announce which coin they are going to throw, there is a big jump,” he says. It seems that someone knowledgeably bought a large amount of this coin in advance, which greatly increased your potential to earn a lot by selling earlier. Hurley didn’t have a chance.

Another example is the DAR token, which rose in price by 72,900% last week, immediately after listing on Binance.

These are not the only cases. An early 2018 study conducted in Telegram groups using the pump-and-dump method showed that 5 minutes before the pump signal (even before the coin was revealed), the selected asset was already increasing by about 5%. Thus, only investors who bought in the first 20 seconds after starting the pump could make a profit.

Today, crypto pumps are developing so fast that some have even developed bots to buy and sell coins based on advertisements placed on Discord. The owner of the Pump It Up group claims that he lost several hundred dollars due to the fact that he did not use a bot that could buy and sell in a matter of milliseconds. This experience prompted him to create his own band in February.

“They target the least informed people,” says Josh Kamps, a PhD student at University College London who studies crypto fraud.

“People who discovered GameStop later want to do the ‘new big thing’.

Kamps found that several low-value coins are born in this context. Coins that were mainly designed for pumping and dumping schemes.

For example, pumping and dumping groups massively flow into the Shiba Inu (or SHIB) coin. A group of imitators from WallStreetBets advertises that they have made a SHIB pump with a return of four times the initial investment.

“Discord has a lot of discussions about personal finance, including cryptocurrencies, investment clubs and day trading. We encourage any creative use of our platform, as long as it does not contradict our values, and is not associated with criminal activity,” a Discord representative told Wired.

The company advises its users to conduct their own research on investment advice received via the Internet.

Pump circuits fall into the gray zone

“There is a lot of debate about whether we should consider cryptocurrencies as financial assets or not,” says Donghwa Shin, a professor at the University of North Carolina, co-author of the 2018 study.

“There is no clear regulation,” he says.

Shin thinks it’s time to change that. According to his research, the liquidity and value of these coins are growing on crypto exchanges, where swapping and dumping are prohibited. This improves the performance of the market, and makes it difficult for a small group of people who organize these pumps (people who earn money from them) to take advantage of them.

“There is a great injustice in these crypto markets. The winners in these markets are insiders. Everyone else is a loser. To protect them, we must regulate this market,” concluded Shin.

Back in 2018, the U.S. Commodity Futures Trading Commission (CFTC) warned consumers to avoid schemes to pump and dump virtual currencies, but also noted that its power in these markets is limited.

However, not so long ago, federal prosecutors charged the late businessman John McAfee and his partner in connection with various initiatives to pump and dump digital currencies. They claimed that between the end of 2017 and 2018, McAfee promoted the coin on his Twitter account without warning millions of his followers that he had previously bought it. The CFTC filed the lawsuit as the first lawsuit against a “digital asset manipulation scheme.”

Conclusion

Today, cryptocurrency also inspires more traditional forms of fraud. The WallStreetBets – Crypto Pumps group committed a $2 million fraud, according to Bloomberg estimates, when it informed its 340,000 Telegram subscribers that it would pump its own currency, WSBFinance.

The asset never existed, it was a pre-sale. Users sent money to a crypto wallet, believing that they would receive a WSBFinance coin. But they never got it.

“We are very sorry! Our bot had a little problem,” the Telegram account wrote to its subscribers. Then, after a short pause: “Yes, by the way: I’m buying a Lamborghini now”. No one else has heard of him.