In the crypto world, “pump and dump” has become a common expression. Simply summarized, it is a kind of price manipulation. “Pump and dump” often happens through large chat groups on chat platforms like Telegram where large groups of people come together to make money manipulating the price of a cryptocurrency or other asset.
Now, a new study by two researchers at the Imperial College London in England shows that price manipulation by “pump and dump” groups each month has a trading volume of $7 million. According to the researchers, there are on average two “pump and dump” frauds every day, the site Technologyreview writes.
Although it can sound like a lot, the study shows that this only accounts for 0.049 percent of all daily trading, according to Coinmarketcap.
How does “pump and dump” work
The “pump and dump” strategy usually starts with one or more people behind a chat group starting to buy a certain cryptocurrency. They buy the currency slowly so the price will not move up too soon. Then they prepare the chat group so that the members are ready to buy the selected cryptocurrency at a given time.
After this, the organizers behind the group publish which currency everyone should buy. All this happens in the hope that when many people buy the cryptocurrency at the same time, the price also rises. Then the idea is that the people in the group can sell at a higher price.
This type of method is illegal in the ordinary securities world, but since cryptocurrencies still are relatively unregulated, it has spread more and more there.
“The study reveals that ‘pump and dump’ organizers can easily use their insider information to take extra gain at the sacrifice of fellow pumpers”, the researchers said, according to Technologyreview.
Could be different signs of manipulation
What the study clarifies, among other things, is that it is a very small part of the total trading volume in the crypto markets that constitutes “pump and dump”.
The study also shows that there are different trading patterns with unusual volumes in a cryptocurrency that may indicate that it will soon be subjected to price manipulation, the site Technologyreview writes.
Read more about a crypto exchange that is planning open price manipulation.