Cryptocurrency Pump and Dump Schemes: Quantification and Detection

Abstract

In the past years, cryptocurrencies have received a lot of attention in popular media. Having attracted significant speculation, prices have soared in 2017, fell in 2018 and are generally known to be very volatile. However, some of the price changes have been due to organized manipulation. Traditionally known in the world of penny stocks and made illegal in most countries, pump and dump schemes are frequent in cryptocurrencies, and mostly unregulated. In this paper, we perform quantification and detection of pump and dump schemes that are coordinated through Telegram chats and executed on Binance – one of the most popular cryptocurrency exchanges. We detail how pumps are organized on Telegram, and quantify the properties of 149 confirmed events with respect to market capitalization, trading volume, price impact and profitability. Based on this ground truth, and regular trading intervals obtained from twitter timestamps, we optimize a binary classifier in order to be able to detect additional suspicious trading activity. Our results indicate that pump and dump schemes occur frequently in cryptocurrencies with market capitalizations below $50 million, that scheme operators often organize their actions across multiple channels, that such activity tends to lead to inflated prices over longer time periods and machine learning can help to identify activity that is similar to known pump and dump schemes.