Market Manipulation: Crypto Pump and Dump Schemes

This is an exclusive, edited extract from  Crypto Wars.

Needles and haystacks

If you look at the price charts for many cryptocurrencies, there is often a very sharp, sudden spike in their earlier days.

Most cryptocurrencies’ charts either have a more or less gradual decline or increase in price, or display a virtually straight horizontal line, indicating not so much a lack of volatility as a lack of trading or interest altogether in the project. You can also sometimes see big waves where the cryptocurrency was gradually manipulated or affected by markets.

But, in many cryptocurrencies, particularly the smaller, lesser-known ones, at one or more times in their history there is a sudden vertical needle in the charts, an almost instantaneous increase in its price by hundreds of percent, and then, shortly, or often even almost instantly, after, just as rapid a decline in its price, back to where it started.

If it didn’t happen so frequently, one might be forgiven for thinking it’s a blip in the charts, a mistake or a problem with the exchange. Except these needles happened all too frequently on charts of many of the smaller cryptocurrencies. These needles – sudden price increases in the hundreds of percent followed by a sharp collapse, were caused by a particular type of very legally grey trade known as the pump and dump.

In the world of crypto pump and dumps, some made money, often a lot, and most lost it all, often within seconds and often without really knowing what had hit them.

Manipulation of markets has gone on since trading began. Unfortunately for those wanting to profit from manipulating stocks and traditional assets, doing so is highly illegal, and tends to result in high fines and jail time.

However, greed, money, and success can be big motivators and there are always some who will keep pushing the grey areas of the law until they either get their way or get caught.

In crypto, there have been a lot of grey areas and the markets were volatile enough for individuals to manipulate to part hundreds of thousands of people, if not more, from their money in a whole series of promotions designed to pump and dump, project after project.

Stock exchanges that don’t take adequate measures to prevent stock manipulations can face heavy legal penalties, so for the most part they play above the law. Unlike traditional stocks where markets are heavily monitored and regulated, cryptocurrency, as we have already seen, has been a bit of a Wild West. Regulation is starting to come, but until then, crypto markets have been treated as a free-for-all adventure ground where anything goes.

As we saw in the first chapter, thousands of ICOs led to the creation of thousands of small cryptocurrencies, most without any use case or value. These smaller cryptocurrencies didn’t tend to make it onto the larger crypto exchanges which provided greater liquidity. Larger exchanges tended to charge higher listing fees and had slightly tougher criteria for accepting cryptocurrencies, meaning that the smaller cryptocurrencies tended to dominate the smaller, more decentralized crypto exchanges. These smaller exchanges were mostly a Wild West on a whole other level within the Wild West that was crypto in the bubble years leading up to 2018.

These cryptocurrencies, with their smaller total market values and their lower liquidity on the smaller exchanges, were easy to manipulate. Some individual investors holding as little as $10,000 or so would often single-handedly be able to distort the market of one of the smaller cryptocurrencies on one of the smaller exchanges.

To manipulate the markets of smaller cryptocurrencies was easy. Just placing large enough buy or sell orders could pump up prices or crash prices down. Anyone looking to manipulate these smaller cryptocurrencies didn’t even need to buy or sell their holdings, just placing large ‘fake’ buy or sell orders was often enough to scare other traders. Just the presence of a large enough sell order would make enough traders think that there may be a problem with that cryptocurrency, or that the person placing the large sell order knew something that they didn’t.

Other traders would often then panic sell, or lower their sell price, offering lower and lower than the large order in the fear that otherwise they wouldn’t be able to sell their holding and would be stuck with a worthless cryptocurrency in a market crash. Just the presence of large sell orders could result in the entire market for that coin crashing significantly down.

Likewise, large buy orders could push the market on smaller exchanges right up for cryptocurrencies with lower trading volumes. Those placing the large buy or sell orders could watch, waiting until the last minute, and cancel their orders. If they had been intending to crash the market down, they would have had their bitcoin ready to buy the same cryptocurrency at its new lower price. And vice versa. Market manipulation at its unregulated best.

Individual crypto traders did their own such trades on smaller or larger scales every day. In a market so volatile that even individual traders could manipulate cryptocurrencies, organized, orchestrated group manipulations run by experts caused chaos.

The art of social scamming

The 2017–18 crypto boom attracted a lot of people who had never traded or invested before.

It’s easier to get into crypto than penny stocks, and the rise of Bitcoin and some of the ICOs had made enough people publicly rich to make others want to risk, often, everything they had to replicate the same wealth for themselves.

Crypto and social media chat rooms went hand-in-hand. Investors flocked to new social platforms that offered varying levels of privacy and encryption. There were thousands of crypto chat rooms on Discord, Slack and Telegram where crypto investors would flock to talk about trading, investment or the different cryptocurrencies. Many of these groups and chat rooms offered genuine advice and useful tips in a great learning environment.

Other groups had darker intentions and were created purely to take advantage of what their often-anonymous leaders saw as easy prey.

Many of the new crypto investors were impressionable and easy prey for a practice that would be illegal in every other market outside of unregulated crypto – the pump-and-dump groups that became prevalent across these social crypto forums.

Pump and dump groups

Pump and dump groups were a whole world of their own within the crypto ecosystem. Entry into the groups could be quite a lucrative revenue stream for their organizers. They charged high amounts, into the hundreds or thousands of dollars per person each month, all paid in crypto.

Needless to say, many group organizers made more from running these groups than they ever did off the back of their crypto knowledge or trading. Pump organizers, being the first to buy in and the first to cash out, dumping their coins onto other pump participants, would almost be guaranteed to make high returns from each pump. Most participants, up to 99% in some cases, would lose their money.

Many of the cryptocurrencies that ended up getting pumped and dumped were already dead projects, ones that had gone bankrupt or their anonymous founders or developers had left the teams; often there had been no work going on the project for months or even years, but people still kept trading them.

Pump and dumps unfortunately weren’t limited to the closed groups created for this purpose. Organized pump and dump market manipulations that were carried out by closed groups by knowing participants were the tip of the iceberg. The majority of the pump and dumps in crypto happened openly in the public eye, promoted by influencers across social media, with their participants tricked into being a part.

Social media influencers and celebrities played a key role. Several have now been fined or even arrested for their roles in manipulating the crypto markets.

Bringing celebrities into the mix

The crypto world worked out very quickly how to use influencers, influencers worked out very quickly how to profit from crypto, and some early crypto followers worked out very quickly how to become influencers.

YouTube channels cropped up that would share positive news and interviews about these cryptocurrencies, all the while making sure their followers would buy up the cryptocurrencies they were promoting and reassuring them that the price would soon increase.

Some of these new YouTubers were motivated by their own gain; they had bought into that particular cryptocurrency early and wanted it to go up in price. Many of the smaller cryptocurrencies had low enough volumes and were volatile enough that one YouTuber’s follower base was enough on its own to pump up the price of their chosen project. These YouTubers and influencers knew this and used their followers to this exact end.

They would often tell their followers how many of the coins they had and how much they had invested, trying to instil trust as they pumped up the price of their chosen cryptocurrency. The more followers they gained, the more the followers bought of that cryptocurrency, so the more the price went up and the more people trusted them.

It was a cycle that would serve to only make the YouTubers and their first followers rich. What they didn’t tell their thousands of followers was that the higher the price of their chosen cryptocurrency went and the more followers they gained, the more of their own coins they sold out on to them, dumping their worthless but heavily inflated coins onto their fans.

These YouTubers would keep pumping the price up until they’d sold the last of their coins of that cryptocurrency out into bitcoin or fiat, and then would move on, no one the wiser that it was their leader who had just pumped up and crashed the price of their chosen cryptocurrency, making millions, sometimes hundreds of millions, of dollars profit for themselves, often leaving their followers worse off than when they started.