Dozens of trading groups are manipulating the price of cryptocurrencies on some of the largest online exchanges, generating at least $825 million in trading activity over the past six months?and hundreds of millions in losses for those caught on the wrong side, according to a Wall Street Journal analysis.
In a review of trading data and online communications among traders between January and the end of July, the Journal identified 175 ?pump and dump? schemes involving 121 different digital coins, which show a sudden rise in price and an equally sudden fall minutes later.
A pump and dump is one of the oldest types of market fraud: Traders talk up the price of an asset before dumping it for a profit and leaving fooled investors with shrunken shares. The Securities and Exchange Commission regularly brings civil cases alleging pump and dumps using publicly traded stocks. Manipulations of cryptocurrencies are no different, but regulators have yet to bring a case in the more opaque market for them. The SEC declined to comment.
?Cryptocurrency exchanges are unregulated markets, so the kind of market manipulation banned on, say, the New York Stock Exchange can essentially be carried out with impunity,? said Ben Yates, a cryptocurrency lawyer at London-based RPC.
The boiler rooms of yore have an online analog in the ?pump group,? a chatroom where coin traders gather. The biggest of the dozens the Journal analyzed is Big Pump Signal, with more than 74,000 followers on the messaging app Telegram. After launching its chatroom on Telegram in late December after reaching capacity on another messaging app, Discord, the group promoted 26 pumps that saw $222 million in trades
Many more such groups exist, potentially adding millions or tens of millions more in activity, the Journal found, but operate in private chat rooms, accessible only by invitation, generally overseen by an anonymous moderator.
These schemes became more pervasive following the recent explosion in initial coin offerings?the securities-like digital tokens sold by startups to fundraise for projects.
Similar practices were outlawed in the 1930s when traders bought and sold stock among themselves to inflate the price before unloading it on the public. Nonetheless, pump and dumps proliferated during the dot-com boom.
The exact number of pump groups involved in crypto price manipulation couldn?t be determined, but the Journal found 63 actively pushing different pump schemes. The groups have names that don?t hide their purpose, such as Orion Pump, MEGA Pump and A+ Signals.
Many of the groups charge monthly fees ranging from $50 to $250 or require members to evangelize the service for access to information. One operation, Cosmic Trading, advertises training and publishes other groups? pump signals.
In a message, the group?s administrator on Discord said Cosmic Trading ?is a publishing company? that is ?strongly against pump and dump.?
It isn?t known how much the pumpers profit, as exchanges don?t publish investor histories. But the operators have an advantage in selecting the coin, buying at the bottom and selling it at whatever peak they decide.
For the traders, ?it?s a gambling thing, and they?re addicted to it,? said Dave Jevans, CEO of cryptocurrency analytics firm CipherTrace. All of them buy in the frenzy with the intention of selling before the dump, sort of like a game of crypto chicken: the longer they wait for prices to peak the more money they can make, but the risk of losing everything is heightened.
It ?incentivizes the poor followers to keep buying until the [target] price is reached, which it often never does,? said Taylor Caudle, who said he ?instantly lost $5,000 in about 30 seconds? in a January operation at Big Pump.
In less than a minute after placing a buy order on a coin called DigixDAO, the price dropped steeply and never recovered, said the 27-year-old Mr. Caudle, of San Diego.
?Needless to say I felt extremely angry, and voiced my findings? on Discord, he said in an email, ?which were of course met with nothing but ?Too slow bro,? and ?Lol sucks 2 b u? comments.?
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