How traders 'pump and dump' cryptocurrencies.
LONDON – "This is the biggest pump community which will help you make money," reads the ad sent to a Telegram channel with 17,000 followers.
The group in question is the "PumpKing Community." It is one of many groups on the messaging app that appear to be dedicated to "pump and dumps" — coordinated buying that artificially inflates the price of cryptocurrencies, in the hopes of attracting outside buyers to then "flip" the currency onto at a profit. Other Telegram groups include Pumpin, Crypto4Pumps, We Pump, and AltTheWay.
Cryptocurrency markets remain largely unregulated and so these schemes aren't technically illegal — yet. However, the same schemes are illegal in the regulated markets that cover assets like stocks and bonds.
Business Insider has detailed the controversy surrounding these kinds of cryptocurrency scams. Scroll down for a step-by-step guide to how they work:
Pump and dump scams are coordinated through groups and channels on the app and advertised in advance. Oscar Williams-Grut/Business Insider
Channels and groups on Telegram are used to coordinate the "pump and dump" scams. Members are told the time of the pump and the trading venue ahead of time to make sure they are ready, but only told the specific coin that is being pumped just moments before to ensure everyone buys at the same time.
The PumpKing Community has over 14,000 users but the above advert claims that over 60,000 people will be sent the pump signal as the announcement in question will be shared to Asian channels.
In this instance, Magi Coin is being pumped on the Bittrex exchange. Oscar Williams-Grut/Business Insider
At the allotted time, participants are told the coin and sent a link to the venue where they should start buying in.
The price jumps on the exchange shortly after the pump command. Oscar Williams-Grut/Business Insider
The pump order coincides with a jump in price for Magi on the Bittrex exchange and unusually high trading volume for the coin in question.
As the pump moves to the dump, those in on the scam spread messages across other channels urging people to buy the coin. Oscar Williams-Grut/Business Insider
After the initial wave of buying, the pump moves to the dump. Those involved in the first wave of buying take to other Telegram channels, message boards, and forums to encourage others to buy the coin in question. Often they will advertise recent news — sometimes something as minor as a new website — or simply say there is a long-term opportunity. The recent price rise is pointed to as evidence that the coin is hot. Almost always, big returns are promised.
Now, the insiders are selling as fast as they can. As the dump gathers steam, the coin's price rapidly declines. Oscar Williams-Grut/Business Insider
As new buyers come into the market, people who originally bought in the first wave of buying offload their coins at the new higher price, hoping to make a return. This wave of selling depresses the price, often to below the level it was at prior to the pump.
While it's not clear if everyone profits, it appears to be market manipulation Oscar Williams-Grut/Business Insider
Here, in another channel, users are encouraged to start buying VCash, simply because the team behind it have launched a new website.
It is not clear whether all of those involved in the pump and dump schemes are profiting from them — if not enough new buyers come into the market, they could be left with a coin that has been pumped to an artificially high price. What is clear though is that people are colluding to manipulate the price, something that would be illegal in most regulated markets regardless of whether they profit.
Pump and dumps appear to be rife, with Business Insider witnessing five in a week. Oscar Williams-Grut/Business Insider
During Business Insider's investigation into pumping and dumping in the market, we witnessed five examples of the scam in action. There appear to be many more, with Telegram channels advertising pumps or "signals" daily.
This image advertises the results of a "pump" sent to one of the groups. It shows the price of VCash rising more than 35% in 5 minutes. Oscar Williams-Grut/Business Insider
Regulators around the world are looking at the markets but they remain a "wild west." The above image was sent to a Telegram group advertising the results of the VCash pump. It shows that the coin's price leapt over 35% in around 5 minutes.
This kind of manipulation appears rife in the market but is difficult to police. The exchanges are, for the moment, unregulated and so those involved in "pump and dumps" are not technically breaking any laws.
However, regulators around the world are cracking down on the market: China has banned exchanges and the US SEC has repeatedly ssignalled that it is likely to treat the ICO market like the stock markets. This could spell the end of "pump and dump" schemes.
Ben Yates, a fintech lawyer at international law firm RPC, told Business Insider: "The reality is that unless and until effective regulation is brought to bear, pump and dump cryptocurrency scammers will continue to get away with it."
2.CFTC to Meet On Bitcoin Futures Self-Certification Issue.
Two committees of the U.S. Commodity Futures Trading Commission will hold meetings this month on digital currency matters, including the self-certification process used to approve new cryptocurrency derivatives products.
In a statement issued Thursday, CFTC chairman J. Christopher Giancarlo said the commission's technology advisory committee would discuss how virtual currencies could be used broadly, while the market risk advisory committee would hold a meeting on the self-certification process for new products and rules surrounding the product's markets.
Last month, a few days after futures exchanges CME Group and the Cboe announced they would launch bitcoin futures contracts, the Futures Industry Association (FIA), an organization of U.S. clearinghouses, said its members were worried about having to pay for outstanding contracts caused by bitcoin's price changes. The group's purpose is to act as a safety net for when a company cannot pay out its contracts.
At the time, the FIA said a public discussion should have occurred before allowing either CME Group or the Cboe to complete self-certification procedures due to bitcoin being a non-standard product.
While Giancarlo did not share any expectations from the meetings in terms of new regulatory policy proposals, he did say "the responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority [and] surveilling trading in derivative and spot markets," among other actions.
Giancarlo said the CFTC is "cognizant" of the risks related to virtual currencies, specifically referring to bitcoin when saying:
"In addition to the nascent stage of the technology itself, risks associated with virtual currencies include: operational risks of unregulated and unsupervised trading platforms; cybersecurity risks of hackable trading platforms and virtual currency wallets; speculative risks of extremely volatile price moves; and fraud and manipulation risks through traditional market abuses of pump and dump schemes, insider trading, false disclosure, Ponzi schemes and other forms of investor fraud and market manipulation."
The CFTC also released an explainer for investors outlining its approach to futures markets based on cryptocurrencies.
Separately from the CFTC announcements, the North American Securities Administrators Association (NASAA) released a warning on Thursday to investors interested in token sales, cryptocurrencies or cryptocurrency derivatives products, including futures contracts.
According to the warning, a survey found that 94 percent of state and provincial securities regulators think there is a “high risk of fraud” surrounding cryptocurrencies. A full 100% of those surveyed believed that greater investor protections need to be implemented through regulation.
The group specifically cited “initial coin offerings and cryptocurrency-related investment products as emerging investor threats for 2018." The organization's president, Alabama Securities Commission director Joseph Borg, said "wild price fluctuations" can encourage potential investors to place funds into high-risk products they do not necessarily understand.
The Securities and Exchange Commission (SEC) released a statement supporting the NASAA warning, noting that investors are protected by state and federal securities laws that sellers must follow.
However, the SEC statement went on to say “it is clear that many promoters of ICOs and others participating in the cryptocurrency-related investment markets are not following these laws.”
The statement went on to note that while the commission would investigate such violations, it could not guarantee that investors would be able to recover lost or stolen funds. The statement concluded with a recommendation that anyone considering investing in token sales read the NASAA warning.
3.ICOs soar as pump-and-dump cowboys trade on 'next bitcoin' FOMO.
The much-hyped technology will enhance productivity across the agriculture, banking, healthcare, logistics and public sectors: a study has found.
Why the hell did Bitcoin roar so much higher last week?
At one point, the price of this invisible, but highly speculative cryptocurrency was almost $4000. Sickening stories such as "if you had invested 50¢ in BTC seven years ago you'd be a quadruple bazillionaire" did the rounds and everyone felt a bit weird.
And while rivers of straight money (read: fiat currencies like the Australian dollar, US dollar and Japanese yen) have most certainly been giving Bitcoin another leg-up in its recent bull run, most of the action has been happening in secondary markets: which this newspaper helpfully described in 2014.
The latest frenzied, frothy churn that's bubbling beneath the Bitcoin surface involves the buying and selling of ICOs, a new shiny crypto instrument.
ICOs are Initial Coin Offerings and one helpful journalist has described an ICO as what you'd get if Bitcoin and Kickstarter had a baby – it's a crowd sale of a new crypto-asset.
Put another way, you know how Bitcoin is the asset that powers the blockchain? And Ether is the asset that powers the Ethereum network? People are basically now creating hundreds of new assets (called coins or tokens) that might power new, yet-to-be-developed peer-to-peer blockchain networks.
And because no one on earth wants to miss out on the "Bitcoin Millionaire" status ascribed to some early investors in Bitcoin, speculators are snapping up hundreds of different coins as soon as they are released. (Most of the ICOs are paid for with Ether, but some accept Bitcoin too and about $US380 million ($511 million) has been spent in these ICO channels).
It doesn't seem to matter that some of these ICOs are no more than a one-page white paper explaining how the developers plan to use the cash they raise and have no actual product at all.
The prices of these fledgling, digital strings of code are rocketing higher and higher, before sometimes keeling over and dying as traders lose their nerve and cash out their Ether or Bitcoin.
But underneath this pump and dump game driven by crypto-hungry cowboys, are some particularly interesting ideas about how to use or build on decentralised blockchains.
One ICO that has gathered, what appears to be, genuine interest is the Basic Attention Token sale: a network enabling users to monetise their attention and personal information in the face of digital marketers.
Another is Zrcoin, a token backed by the physical production of zirconium oxide. Another is Gene-Chain, a platform for patients and researchers to securely store and exchange genomic data.
And a few more mainstream names are issuing ICOs.
Messaging app Kik Interactive, which boasts 300 million users, will release a token called "Kin" in an ICO this week. And cloud-storage start-up Storj raised nearly $US30 million in five days via an ICO.
But of course, this is all heady speculation and for every good idea there are hundreds of scams.
Matchpool ICO investors got a fright when the chief executive suddenly withdrew the 37,500 Ether ($8.9 million) raised without any explanation. And one crafty group are trading on the Rothschild name with "Rothschild Family LCF coins" purporting to streamline payments for Internet of Things devices.
No one knows how the legality of these things work and, like any speculative market, no one knows which project will actually get off the ground.
But the deep seeded FOMO that has gripped many who are dumbfounded by the run in Bitcoin suggests we are in for plenty more frenzied crypto-activity.