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Scientists have developed an algorithm that can predict pump-and-dump schemes


Last year’s rise of Bitcoin stimulated the rapid development of other cryptocurrencies. In the theory of Altcoins should have repeated the success of the main cryptocurrency. But the reality is that most of them today are traded in small volumes and are virtually worthless.

The success and anonymity of cryptocurrency have long attracted not the most conscientious people. Cryptomedia is littered with stories about trafficking in illicit goods, theft and fraud. And pump-and-dump schemes have become one of the most common types of fraud in the last year.

Quite a little is known about how such schemes are arranged, but this may change thanks to the work of Jiahua Xu and Benjamin Livshits from Imperial College London, writes MIT Technology Review. They studied pump-and-dump schemes in cryptocurrency markets and published the first detailed report about them. In addition, researchers have developed an algorithm that can predict these patterns.

Xu and Livshits claim that on average, two pump-and-dump cases occur every day, which each month generate about $7 million in trading volume. So someone makes a lot of money on this.

To study the details, the researchers focused on one scheme, which was held on November 14, 2018, at 19:30 GMT. They searched for details across multiple channels in Telegram. The largest, McAfee Pump Signals, has more than 12,000 participants. Then they recorded changes in prices and trading volumes in the selected currency.

At 19:30:04 McAfee Pump Signals signal pointed to the selected coin – a little-known cryptocurrency called BVB, which was created in 2016 by fans of the German football team Borussia Dortmund. The coin was “rolling” for more than a year with little trading activity and a price of about 35 satoshis.

Then it all happened very quickly. “We noticed that the first purchase order was placed and executed within 1 second after the announcement of the coin,” said Xu and Livshits. “After 18 seconds, the price of the coin flew to its peak.” At the peak of the BVB reached 115 satoshis.

But not all Telegram channels responded so quickly. Anyone who subscribed to Bomba bitcoin “cryptopia” was in a very disadvantageous position, as this channel announced the pump at 19:30:23. “Please note that Bomba bitcoin“ cryptopia ”announced the coin already when its price was at its peak,“ said Xu and Livshits.

Then, when the organizers took a profit, the price dropped. “Three and a half minutes after the start, the price of the coin fell below its price before the pump,” the researchers say. After that, the trading volume decreased significantly.

An analysis of Xu and Livshits reveals the rather interesting details of this event. First, anyone who joined the pump in 18 seconds could not count on a profit.

Secondly, pump participants bought twice more BVB coins than they sold. This suggests that many of them were left with unsold coins. “These holders can only rely on the next pump, which, however, may never happen,” say the researchers.

Xu and Livshits studied 236 other pump-and-dump episodes between July 21 and November 18. They say that many of them were preceded by an unusual activity on the purchase of the target currency. In other words, insiders have accumulated currency before the pump. “The study shows that the organizers of the schemes can easily use this insider information to gain additional profit at the expense of other participants in the pump,” said Xu and Livshits.

Based on this fact, the researchers suggested defining such unusual activity in obscure coins before pump-and-dump. To find out whether this approach works, Xu and Livshits used historical data from already known schemes to train their algorithm, which was supposed to determine in advance the signs of a possible pump.

The algorithm found such activity six times between October 30 and November 6. Five of these warnings turned out to be pump-and-dump schemes.

Most likely, fraudsters will quickly change their tactics, but such a decision of researchers can prevent the wider spread of such schemes.

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