A new study authored by Tao Li, Donghwa Shin, and Baolian Wang titled ‘Cryptocurrency Pump-and-Dump Schemes‘ has revealed the anatomy of pump and dumps on the crypto market by studying 500 events. It is found that pump and dumps certainly lead to rapid gains, but are very brief with a price peak of 25% on average about 70 seconds after beginning, and waiting a minute too long to sell can mean losses for traders who try to make money off of pump and dumps.
Pump and dumps are actually organized by groups who intentionally try to manipulate market price. They do not keep it a secret, they actually aim to spread the info about pump and dumps across social media, especially Telegram, in order to get other people interested. Their business model makes money since the organizers slowly buy some of the crypto they are pumping before anyone else knows, and then when everyone else jumps in to ride the pump, the organizers dump. Indeed, abnormally high volume and a 5% increase on average is observed in the 5 minutes before a pump and dump is announced.
Further, pump and dump groups often offer premium membership, where they tell traders about which crypto will be pumped before anyone else knows. It is calculated these traders make 18% profits on average, which is near the maximum profit possible for a pump and dump.
As for everyone else who is not an insider, they must react quickly to be successful. Traders must buy in the 10-20 seconds after a pump and dump is announced, and sell in less than a minute to have any chance of making a profit. If a trader buys 1 minute after a pump and dump is announced, they will almost always lose money. This means traders must constantly refresh the pump and dump announcement page, and have the trigger finger of a skilled video game player when buying and selling, to have any hope of success.
Pump and dumps originated on the stock market, where firms would buy up large amounts of small or micro-cap stocks, sell as much of the stock as possible to other people, and then dump their shares once buying pressure dried up. This can be considered illegal and the Securities and Exchange Commission (SEC) can crack down on anyone using such tactics. However, in the crypto markets, there are no laws or enforcement regarding pump and dumps, allowing organizations to pump and dump cryptos every day regardless of consequences.
The essence of this study is that pump and dumps can be profitable, but usually only for the people who are organizing the pump and dump, and non-insiders are taking a big risk participating in such schemes.
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