The thieves of the modern world may use new tools to rob you — think social engineering your password rather than pointing a gun — but the basics of crime really haven’t changed much. When cryptocurrency was being stored in exchanges, the bad guys quickly saw something that looked a lot like a bank. After all what was Mt. Gox but a place where lots of money was being held/ Steal the bitcoins, get away with it, and voila you’re rich.
The good news is that not everyone has the wherewithal to hack an exchange and the security of those has gotten better. The bad news is, well, bad people: They almost need to find a way to separate you from your money.
They may be dress in pink sheets, but they’re wolves nevertheless
One of the popular financial scams of the 1980s bull market was small brokerages that would heavily market “penny stocks” — securities with small share prices and low trading volumes — to the unsuspecting. These so-called boiler rooms would carve out a large position in one of said stocks and then encourage their clients to buy it, promising a big up move. There was often some story about a breakthrough technology or big upcoming business deal to explain why “Not Worth a Penny, Inc.” was about to soar. Information about these companies was always scarce. Their prices were once available solely on printed paper with a hue that gave rise to the name “pink sheets.”
Fans of Scorsese and DiCaprio probably know some of this story from The Wolf of Wall Street, the mostly true story of Jordan Belfort and Stratton Oakmont, his shady brokerage that bilked investors out of millions. Unfortunately, those movie lovers weren’t the only ones thinking about the ideas dramatized in the film.
Pump → dump → profit
The incredible proliferation of initial coin offerings — $20 billion raised in just the past 18 months — has led to the late-2010s equivalent of the penny stock: cryptocurrencies called altcoins (or sometimes more derisively: “shitcoins”) that represent nothing of real value and trade lightly as a result. Most volume comes from the unfortunates who bought the ICO and are desperately looking for someone — anyone — to buy the coin and return some of their capital.
These suckers have found an ally of the worst kind: pump-and-dump groups that have figured out how to profit in a way that would make Belfort and his Stratton team envious.
The scam is simple. First, recruit a willing bunch of buyers. Typically, these folks will pay you for access to information because you are promising them quick profits. Second, pick an altcoin that’s reasonably easy to trade. So far, this seems almost reasonable, right? “We’ll all buy this together and inflate the price! Everybody wins.”
But if you’re running one of those “pump groups” the next step is nefarious. Acquire a bunch of the altcoin yourself before revealing to the group what the upcoming buy will be. Because of light trading volumes, the very action of getting your buyer collective into the coin is what will cause the price to rise! So for the pump-group operators, it’s necessary to front run as much as possible. While this is completely illegal in the stock market (ask Belfort, who pled guilty, went to prison, and was ordered to pay millions in restitution), so far the SEC has done little to police the same scheme with respect to crypto.
Of course, once you’ve successfully front run the trade of the anointed coin, your real profit comes next. As your group starts buying at the announced time, the pump group insiders start selling into the big upward price move. This insidiously accomplishes two goals at once (1) the selling creates the appearance of liquidity in the coin, allowing buyers to find larger amounts available for purchase than normal (2) the sellers are quite literally profiting at the hands of the very people they are purporting to help. They’ve taken your money for the information on which coin to pump; and they’re taking it again right now selling you that coin at a profit they’ve almost entirely manufactured by recruiting you as a buyer.
Let a thousand flowers bloom
The Wall Street Journal took a look at data just from the first half of 2018 and found an astounding 175 pump-and-dump schemes in crypto involving $825 million in trading volume. (It’s safe to assume hundreds of smaller schemes abound, albeit at levels that failed to catch WSJ’s screen.)
Each involves one or more “pump groups” that manage the scheme, much like Stratton Oakmont back in the days before the consumer internet. But the seeming transparency of what’s going on is new, if not especially refreshing. The biggest group found by the Jounal is called Big Pump Signal, with 74,000 followers on the Telegram app. Big Pump Signal is the 800-pound gorilla of this nascent trend.
Big Pump Signal was responsible for 26 pumps this year, but an astounding $222 million worth of trading volume. The Journal looked at just one of these pumps, involving cloakcoin, which ostensibly is useful for untraceable transactions. Cloakcoin, per the data at CoinMarketCap, is the 328th most valuable crypto tracked by the site. It’s got a total capitalization of a “whopping” $13M and in the past day about 1% of that total changed hands. By contrast the volume of 33rd-ranked ICON in the past day was greater than the total capitalization of Cloakcoin.
On your marks, get set, pump
With the help of Binance data, the Journal was able to recreate the trades in Cloakcoin on the day of the pump.
Announced at 3PM eastern — “@everyone be sure to ride the waves!” Big Pump’s leader wrote on Telegram — it took mere seconds for the price to rise 30%.
In less than 2 minutes, Cloakcoin was trading 50% higher than it had been at 2:59PM.
That led to enough selling to push the price down by nearly 20% over the next 2 minutes.
6,700 trades representing $1.7M had been executed versus essentially zero in the hour preceding the pump
Difficult — if not impossible — to say how much was made on this pump, but Cloakcoin now trades for $2.52, lower than where it was when the pump scheme commenced last month. Still it’s safe to say some made thousands on the way up, almost certainly including the insiders at Big Pump Signal. Many of the rest surely bought near the peak and realized in panic they had to sell once the price started to fall. Still others are likely holding Cloakcoin even today, hoping to sell it for what they paid. Likely a vain hope indeed.
Not just one bad actor
As “successful” as Big Pump Signal is in running pump schemes, they are most certainly not alone. PumpMyCoin, for example, describes itself as almost a democracy. They will let members vote on which coins to consider for “pumping.” And the group offers what almost amounts to a service guarantee:
Unlike the other pump and dump scam/groups. We will keep monitoring the market, in order to maintain its uptrend to make sure that our community members are satisfied with their gains.
How they achieve this is unclear, but part of the mechanism is that members have to pay in bitcoin to vote for the coin du jour (0.002 BTC, minimum, they say buys you the franchise, or very approximately $15 today). They promise to use the proceeds from this poll tax “in the price trending scheme to make sure that most of our community members make a profit, and also to avoid the pump and dump schemes by traders from outside of our community.”
Well thank goodness for that! There appears to be no money-back guarantee nor any promise how long the price will be maintained to allow for this profit. Nor really any information on who these folks are, which makes sense given the SEC might decide one day to haul off all these pumpers and prosecute them.
Inside the boiler room
Back in January, The Outline took a look inside this shady world. From the spammy fraudulent links to get folks to sign on in the first place, to the absurd claims of what would happen next (make 300% profit, buy a “Lambo” — Lamborghini being the aspiration car of choice for many crypto fans). These groups blend the worse of multi-level marketing, aka pyramid schemes, along with appealing to our most foolish instincts.
Fail to time your sell on a recent pump right? Just blame yourself for bad timing and try again. After all, you have money to win back! Wait, win? This is investing, right? Nope, more like gambling where the house edge is exceptionally large. These pumps are typically run on just one crypto exchange, often Binance, to allow for a robust market to be made and the lack of cross-exchange price discovery to be a non factor.
And the newcomer is almost certainly far down the food chain. The heart of the scam comes long before the pump is announced to the world, when the fees are collected and the coins accumulated by insiders.
It’s possible to win here, much like you can find the queen in a few rounds of Three Card Monte but in the end the only players here are the suckers. The WSJ found some happy winners from the Cloakcoin pump, including one who claimed a $1,400 profit. It’s almost certainly nothing compared to what the folks at Big Pump Signals took off the table that afternoon. And those who walked away down that day weren’t likely bragging about it.
Keep that in mind the next time you see someone promising easy profits in a crypto pump. The water might seem to be fine, but the only thing getting boiled is you.
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.