On December 18, a team of researchers from Tel Aviv University, the University of Tulsa, and University of New Mexico published findings from a six-month study into pump and dump schemes. The key finding of the paper, called "The Economics of Cryptocurrency Pump and Dump Schemes," is that "pumping obscure coins (with low volume) is much more profitable than pumping the dominant coins in the ecosystem."
For the uninitiated, pump and dump schemes are scams in which a group of people coordinate to buy an asset, thereby increasing trading volume and, importantly, price as it attracts other investors. They then dump, or sell, the asset en masse to make a profit.
The study looked at 4,818 such schemes that took place on Discord and/or Telegram from mid-January to early-July 2018. The schemes fell into three categories: "obvious pumps" which made no attempt to hide what they were doing; "target pumps," which were coyer, ostensibly to avoid future legal consequences; and "copied pumps," which copied other schemes' leads. The researchers point out that smaller groups use copied pumps as they build up users.
The differences in approach can be explained, in part, by the lack of regulatory oversight. As the authors of the study point out, "The U.S. SEC actively prosecutes pump and dump cases using publicly traded stocks. Such schemes involving cryptocurrencies are not any different. However, regulators have yet to prosecute pump and dumps involving cryptocurrencies. With the exception of insuring that taxes are paid on cryptocurrency profits, US regulatory policy towards cryptocurrencies and initial coin offerings (ICOs) has been generally been [sic] 'hands-off.'"
Noting that there's been other scholarly work on pump and dumps, the authors point out that they have gathered more instances of pump and dumps "without restricting [themselves] to the successful pumps."
So, what makes for a successful pump? The researchers established four independent variables: the number of exchanges the coin is on, its market capitalization, the number of available trading pairs, and (for Discord) the number of members in a server (which feature channels where pumps may be discussed).
According to the researchers, market cap is the most important variable for success (using regression rather than a specific threshold). As they explain:
"Coins with lower market capitalization typically have lower average volume. Lower average volume gives the pump scheme a greater likelihood of success."
Indeed, the median price increase for pumps – here measured as "the maximum 5-minute percentage jump between two consecutive price data points (typically spaced 5 minutes apart)" – of coins that were ranked below the top 500 on CoinMarketCap.com was 23.2 and 18.7 percent on Discord and Telegram, respectively. That compares to a 3.5 and 4.8 jump for coins that were in the top 75 in terms of market capitalization.
But the researchers are clear that pumps of bigger coins are not uncommon. Tyler Moore, one of the report's authors, told ETHNews:
"Note that there is nothing a coin can do to prevent someone from attempting to pump it, so it's not surprising that some actors would try to promote these more popular coins. We observed the pump signal message being transmitted, then examined the associated price rise. We found that overall, the percentage point increase was lower for the more popular coins. The potential absolute profit from pumping depends on the position that the pumpers take in the coin before promoting it, of course."
While a 3.5 to 4.8 percent price increase for a pump on, say, ETH or BCH, is less than a 20 percent jump for a 10 cent coin, in absolute terms it could still be quite profitable. What the researchers find, however, is that it's harder to manipulate as there are so many actors that could be working against it. If a whale sells, for instance, the price might actually go down.
As they state in the report: "The number of exchanges on which the coin can be traded is negatively associated with success. This makes intuitive sense, because with fewer exchanges, pump schemes have better control over the total volume of the coin."