The rise of interest in cryptocurrencies amid Bitcoin (BTC) and Ether (ETH) bull runs often goes hand in hand with the proliferation of scams and manipulation schemes related to various altcoins. One of the main manipulation schemes running in the crypto markets is pump and dumps. These schemes artificially inflate the price of the asset to enable a select few to sell it at a higher price before it ultimately comes crashing down.
What makes crypto markets more vulnerable to such schemes when compared with traditional equity markets is that cryptocurrency is an asset class that is void of underlying fundamentals, while securities often have company fundamentals backing them.
Thus, the primary driver for these markets is the sentiment that prevails among investors. The market sentiment is what the proponents of these schemes manipulate to pump up the price of the assets in question.
Social media in full use
The retail trading frenzy recently witnessed in the equity markets drove up the share prices of securities like GameStop and AMC Entertainment, with the subreddit r/Wallstreetbets playing a major role in driving the prices up, combined with Twitter.
This effect now seems to be spilling over to digital assets like Dogecoin (DOGE) and XRP through r/Wallstreetbets’ crypto wing, r/Satoshistreetbets. Jay Hao, CEO of crypto exchange OKEx, told Cointelegraph that there is a deeper cause driving this current phenomenon:
“There is a great sense of injustice about some of the opaque practices of Wall Street and the unfair distribution of wealth. I believe that more and more of society is beginning to wake up to this fact particularly with the K-shape recovery that we are seeing in which high-net-worth individuals have increased their wealth during the pandemic. With more platforms allowing retail investors direct access to invest in equities, we are seeing a democratization of the investment space and more power in the hands of the people.”
Although the r/Wallstreetbets phenomenon is fairly recent, pump and dumps have been around for some time in the crypto market. In fact, a study conducted by Imperial College London in December 2018 found that pump-and-dump schemes accounted for $7 million of the monthly trade volume in the crypto industry at that point in time.
Back then, the channels used for these schemes were mainly found on Telegram, including “Official McAfee Pump Signals.” Joshua Frank, co-founder and CEO of The Tie — a social media analytics firm — told Cointelegraph how these scams were proliferated in the past, leading to high volumes and price rises:
“People have been doing this in crypto going back to 2016/2017 when pump and dump groups were extremely prominent within the space. [...] The founders of the Telegram channels pre-bought the asset and then announced the pump at a set time. The founders all made money, while most of the users ended up getting dumped on.”
DOGE and XRP get inflated
Dogecoin is a Shiba Inu-themed meme token that was created as a joke by software engineers Billy Markus and Jackson Palmer and is often treated lightly by the crypto community, and as a result, the asset has seen several pump-and-dump scenarios in the past.
But the most recent event turned out to be a little different because it started with a tweet from Elon Musk on Jan. 29 that showed the Dogecoin dog in a red sweater on a fake cover of a fictional magazine called “Dogue.” This tweet set off another chain of pump-and dump scenarios, driving the price of the coin up 300% before traders reeled from yet another dump, with its price falling below $0.03.
On Feb. 4, Musk wrote another series of tweets about Dogecoin, one of which read “Ur welcome” accompanied by a doctored picture of himself as Rafiki from The Lion King and the Dogecoin dog as Simba. He even went on to say that “Dogecoin is the people’s crypto,” which again led to the price almost hitting $0.06 before returning to the $0.05 level.
This clearly is evidence that Musk is pumping DOGE, although there might be a lack of personal ulterior motives in this case, as he further went on to tweet, “I am become meme, destroyer of shorts,” referring to all the Wall Street bankers who were short on stocks like GameStop and AMC before these stocks rallied, leading to a cumulative loss of over $70 billion for Wall Street.
XRP, though, is altogether a different story. Ripple is currently tied up in a lawsuit with the United States Securities and Exchange Commission, and the case is based on the argument that XRP is actually a security. Starting on Jan. 30, r/Wallstreetbets members rallied to purchase the token en masse due to two factors: They considered XRP to be undervalued, and it could be a way of punishing the SEC to avoid unwanted bureaucracy.
The move took the price to a two-week high of $0.75 before it crashed nearly 50% to a low of $0.39, which left Redditors enraged. Ben Zhou, CEO of cryptocurrency exchange Bybit, told Cointelegraph:
“The recent feats of r/wallstreetbets have made social media and Reddit users realize how powerful a force a decentralized online community can be when they put their mind to it. The ongoing legal troubles of XRP’s parent company Ripple Labs have rinsed out much of the shorts and made the gambit easier to execute, while the jocular nature of DOGE means it’s likable and easy to root for — thus in both cases there was not an immediate selling power to counter the pump.”
Severe risks to the entire industry
Since social media platforms like Twitter are often used as a channel for these schemes, it’s important to have a metric by which investors can gauge market sentiment in relation to actual trading volumes to avoid getting into risky situations.
The hype-to-activity ratio is an important metric for that, as it measures the number of tweets a particular coin has about it per each $1 million in reported trading volume. As The Tie’s Frank told Cointelegraph, the average hype-to-activity ratio for crypto markets is 1.02, which essentially means that on average, cryptocurrencies see 1.02 tweets per $1 million in reported trading volume. Frank further elaborated on the way in which this ratio can be used as an indicator:
“High Hype-to-Activity ratios may suggest that a particular cryptocurrency is overhyped in social conversations relative to the amount of trading activity that it has. It is a good metric for identifying outliers or for tracking the number of social conversations a particular coin has relative to its trading volume over time.”
The coins that make the top of the ranking are possibly the most overhyped coins in the crypto industry, according to the metric from The Tie. In addition, Zhou mentioned that retail investors are the most susceptible to these schemes: “Pump and dump schemes trap uninformed retail investors when they, for the fear of missing out a payday, enter the market, only to find themselves captured by a lower price before they even realize.”
Ultimately, this leads to people being disenchanted with crypto in general, which leads to extreme damage to a coin’s reputation, problems with regulators and a loss of trust from investors. Referring to pump and dumps that were rampant during the time of the initial coin offering boom in 2017, Hao further pointed to the way these scams affect the crypto industry as a whole:
“Many other unscrupulous investing practices, schemes and scams happened at that time that led regulators around the world to take action to warn investors or even ban cryptocurrency in some places.”
Frank also elaborated that investors can avoid falling prey to such schemes by using several metrics, highlighting the recent XRP pump as an example: “XRP earlier this week, the area line shows the massive spike in Twitter activity. The line shows price. You can see a big spike in XRP conversations coinciding with a massive rise in price, XRP fell significantly from the top of that rise.”
Thus, it’s highly essential for investors to stay cautious in times of heightened volatility. Attributes like sound research, a calm head and clear strategies are key for investors to protect themselves from the pump-and-dump schemes in the crypto industry right now.