Like being a cow in an understocked McDonald’s
Cryptocurrencies, and in particular meme coins, are not just extremely volatile speculative ‘investments’. These markets are ripe with manipulation and actions that would be classified as securities fraud if anyone were to do that with stocks or futures. A study by researchers from University College London looked at who runs the many pump-and-dump schemes in the crypto world and how much money the masterminds of these schemes made. And the results were surprising even to a sceptic like me.
The researchers developed a detection system that tracks real-time data from cryptocurrency markets and constructs graphs of how information flows across them. Using neural network techniques, they could then identify pump-and-dump schemes and the masterminds behind them.
I don’t pretend to understand exactly what they did. Even after reading the paper twice, I still understood only half (if at all). So, I rely on what they say in their paper. They ran their fraud detection tool in live markets from 16 February 2024 to 9 October 2024.
During this period, they identified pump-and-dump schemes in 322 different cryptocurrencies. The total crowd-pump trading volume was $8.07 trillion, or 67% higher than the volume in regular trading. This alone shows that pump-and-dump schemes are a significant source of all the trades going on in crypto markets. And these schemes are orchestrated by a tiny number of fraudsters. The researchers identified 438 masterminds driving these schemes.
The currency most often targeted by these fraudsters is, of course, Bitcoin. But Bitcoin Cash, Chainlink, Cosmos, Coti, Filecoin, Aave, and BakeryToken were targeted by almost as many fraudsters as Bitcoin.
The paper doesn’t say how much money these fraudsters swindled from speculators who bought these coins, but Chainanalysis estimated that in 2023, people who launched new tokens and sold them in a perceived pump-and-dump scheme made some $241.6m in profits.
The analysis of masterminds behind pump-and-dump schemes shows that fraud is frequent in the crypto space. And if you are not the one committing the fraud or being tipped off by a fraudster, buying and selling cryptocurrencies is like being a cow in an understocked McDonald’s. It likely isn’t going to end well.
Prices of cryptocurrencies frequently attacked by pump-and-dump schemes
Source: CoinMarketCap.
I was pleased to hear the discussions on these topics use gray area terms. Too often I read about absolutes that ignore the messy details of modern life.
All very interesting, but in my opinion any holding that pays no reward is speculation. Even gold. You hold it in the hope of "finding another fool" who will pay you more than you did.