Inside the World of Pump & Dump schemes and Tellegram’s private group operations.

Instead of happening once every few years in traditional financial markets, P&D takes place multiple times a day, and they aren’t restricted to only one nation but are international. In the Crypto space, organisers of P&D groups choose the next meme coin to pump on Telegram and set a date for ‘the Pump.’ There are hundreds of groups for this purpose, and often they coordinate with other groups to make the pump even bigger for a bigger payout.

Why Telegram?

Telegram provides its users with three distinct advantages.

1. Telegram uses end-to-end encryption, which means nobody apart from the sender and the receiver can read the messages.
2. Users cannot forward chat messages to others outside of the conversations, and there is no digital print left on Telegram’s servers once the chat is deleted.
3. Users can use aliases to hide their identities.

It is considered one of the most heavily encrypted messaging platforms. All of these features make it difficult for law enforcement to track the Pump groups. To attract new members, P&D operators advertise their pump groups on social media apps such as BitcoinTalk and Reddit. They often encourage existing participants to do the same. Some operators offer monetary incentives to members who bring in new members to the group at a given time.

Not all group members get the same treatment from the operators. Tiered access to the pump signal appears to be the norm in many groups. High ranking members of the group may be sent signals a few seconds before the lower-ranking members of the group. In some groups, members can pay a fee to become VIP members; however, the existence of VIP members is not common knowledge.

Isn’t P&D illegal?

Pump and Dump schemes in stocks are illegal in most countries, and penalties are severe. And the stock exchanges that don’t follow the rules and guidelines set out by ASIC in Australia and SEC in the U.S. can face legal action against them. The Security and Exchange Commission regularly targets P&D scams in the share market. Section 9 of the Security Exchange Act 1934 specifically made it unlawful to manipulate stock prices.

However, P&D groups in the cryptocurrency space have been operating relatively efficiently because crypto is not considered securities, and the exchanges are currently almost unregulated markets.

Despite the regulatory scrutiny, P&D groups are still operating with relative impunity. In December 2017, SEC stated cryptocurrencies and ICO’s, warning investors of scams and criminal activities in the space. Feb 2018, Commodity Future Trading Commission (CFTC) published a customer advisory warning investors to avoid P&D in the crypto space.

In trade-based price manipulation theories in the stock market, a manipulator cannot act other than buying and selling an asset. The manipulator has to buy the asset in large quantities to inflate the price. And soon after that, manipulator starts to sell their holding at an inflated price.

However, in the cryptocurrency space, the pumps are driven mainly by uninformed outside traders who analyse the quick uptrend in a given coin and buy it in hopes to ride the gravy train as long as possible. 

But why these outsiders are willing to participate in the P&Ds?

1. P&Ds attract overconfident investors who think that they have the ability to time the cryptocurrency market better than others.
2. Another plausible explanation can be that these investors are affected by the heights of short-term returns and overweight the possibility that they’ll realise the same returns in the future. 

Investors in the crypto space can be overconfident after timing a couple of P&Ds and think of themselves as George Soros. Only a minority of traders often know when and which meme coin will be part of the next P&D to exploit the market asymmetry. To minimise the imbalance of information, The U.S. Commodity Futures Trading Commission (CFTC) offers eligible whistleblowers between 10–30% value of enforcement actions that involve $1m or more in P&D trading. 

Credit: Cryptocurrency Pump-and-Dump Schemes.

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