With shares it is forbidden, but with cryptocurrencies no one can do anything about it: ‘pump-and-dump’ practices. In addition, a group of people tries to make money by manipulating the value of a coin and selling it at a profit. After that, the value collapses and the loss is ‘dumped’ on the buyers who last stepped in.
It has been known for several years that this happens. Nevertheless, the Dutch supervisory authority AFM, which watches over the financial markets that include share trading, for example, still cannot do anything about it because crypto coins do not fall under AFM supervision. The European Commission is now looking at whether that should change in Europe.
This kind of market manipulation, in which the organizers often know more than the rest of the market and deliberately spread misleading information, has been around for centuries. It is also not new with crypto coins. In 2018, several studies already appeared showing that the ‘pumping and dumping’ of cryptos was widespread, especially in groups on the discord and telegram platforms. Popularity seems to be rising
It seems that more of these groups are popping up again lately. “I haven’t done any research on it, but I do see that the groups appear more often and get ads forwarded more often,” says Josh Kamps of University College London. He investigates fraud with crypto coins.
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That may have to do with the increased popularity of crypto coins, thinks expert Peter Slagter, founder of the knowledge platform LekkerCryptisch. He sees that pumping and dumping mainly happen in periods when there are many consumers active in the market. On social media, the many links to groups are easy to find.
According to Kamps, a possible explanation is that the price of crypto coins has risen. “Then you see new people step in. The manipulations also come to the attention of the general public and thus become mainstream. They work best with inexperienced people, who are not yet very familiar with cryptocurrencies.” How a pump and dump works
The manipulation goes like this: in Telegram and Discord groups, anonymous administrators announce in advance the date and time when the ‘pump and dump’ will take place, so that participants can sit ready. Only at the announced moment do the administrators announce which cryptocurrency everyone should buy.
The administrators then encourage everyone to promote the cryptocurrency as much as possible on social media, so that even more people invest in it and the price shoots up further. This allows the first buyers to sell the coin for a much higher amount. And that is paid for by the people who buy and sell just a few seconds later: they take the loss.
Below you can see how in a Telegram group with more than 150,000 members on April 21 at 23:00 the cryptocurrency Viacoin was dumped and dumped. Some of the members may be fake.
On the evening of April 21, the value of Viacoin shot up by almost 150 percent in a short time and was traded for almost 50 million euros between 23:00 and midnight. For comparison: in the past week, the trading volume per day is about one million euros.
But what is even more striking: the price of Viacoin starts to rise a few minutes before 23:00. That suggests that some people have had prior knowledge.
“These are really fraudulent organizations,” slagter said. “There are people behind it who respond to it. They first buy in themselves, without people noticing.” Often spread over a longer period of time, so as not to stand out.
And it goes even further. “Then they will give a select group of people access, which they call ‘VIPs’. Sometimes there are whole layers of VIPs. They are already buying in. And then report it to all followers.”
The uninitiated people buy the coin for a high amount and are left with it when the first buyers sell and the price collapses. Then no one wants to sell the coin.
Here you can see how the price of Viacoin started to rise a little before 23:00. The peak moment was around 23:09. Within an hour the price was already below the old level.
The managers often choose cryptocurrencies with a relatively low value, which are not traded very much. This makes the value easier to manipulate.
Whether there will be supervision of the trade in cryptocurrencies in Europe has yet to be decided. The Dutch supervisory authority cannot therefore intervene. The Netherlands Authority for the Financial Markets says it is keeping an eye on developments and frequently warns about the risks of investing in cryptos.
Who the administrators and participants are and where they come from is often not known. “Cryptocurrencies exist worldwide and can be purchased almost anywhere,” says Kamps. “The activities mainly take place in anonymous chat rooms. If a country is going to make strict laws, people will go elsewhere to buy the cryptocurrencies.”
You can hear more about the research into ‘pumping and dumping’ in podcast De Dag.
