Imperial College London built algorithm to foil pump-and-dump schemes

Imperial College London built algorithm to foil pump-and-dump schemes

Cryptocurrencies have been labeled the most volatile asset class in history, and for that reason, many of the monitoring services employed by traditional stock exchanges to ferret out price manipulation or pump-and-dump schemes just do not work in the crypto world. Jay Clayton, the chairman of the SEC, has continually castigated exchanges in the crypto arena to adopt necessary monitoring routines before his agency can consider moving forward on a Bitcoin ETF.

News today is that the Imperial College London has developed a unique algorithm that could seriously curtail the incidences of pump-and-dump schemes in the Initial Coin Offering (ICO) sector of the crypto ecosphere.

Imperial College London is a world-class university with a mission to benefit society through excellence in science, engineering, medicine and business. It is a public research university located in London, United Kingdom. Its founder, Prince Albert, envisioned a cultural area composed of the Victoria and Albert Museum, Natural History Museum, Royal Albert Hall, and the Imperial Institute.

Dr. Jiahua Xu of the Department of Computing noted that:

Long used by traditional financial markets, pump-and-dump schemes are now common in crypto financial markets too. Pump-and-dump scheme organisers often use their knowledge to gain from pump-and-dump events at the sacrifice of fellow pumpers, and the practice costs the cryptocurrency market seven million USD per month. Deceived by the scheme, many investors rush into purchasing certain coins and lose money.

Organisers of pump-and-dump schemes have an easy row to hoe in the crypto world, especially with ICOs, which are unregulated and have rarely earned trading status with an exchange. When one does qualify, however, then the fun begins. These token offerings have little in the way of liquidity or even a history that could guide investors as to appropriate entry and exit points. In a way, these ICO offerings resemble the “penny stock” world, where anything goes. Pump organizers may use social media to promote their token or arrange for designated buyers to create a “fake” rush on the offering. In any event, the goal is to drive up the price, then dump the tokens on unsuspecting victims for a profit.

As Dr. Xu explains:

Organisers of these schemes, who control the process and are ahead of the curve, can make large profits – while less experienced users often fall behind the curve and lose money.

In their study, the researchers:

  • Traced the message history of over 300 Telegram groups from July to November 2018, and identified 220 pump-and-dump events orchestrated through those groups.
  • Found that around 100 Telegram pump-and-dump groups organise two pumps a day on average, ultimately encouraging investors to spend seven million USD per month.

The researchers were then able to craft a software-driven, self-learning algorithm that could spot which tokens were about to undergo a “pump-and-dump” scenario. Dr Xu concludes:

Like the buyers who fall victim to these schemes, market regulators often fall behind the curve of pumping-and-dumping. Our paper suggests a cheap and relatively easy way to tackle the issue.

If you wish to learn more or obtain an early version of the paper on this topic, click here.

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Imperial College London built algorithm to foil pump-and-dump schemes


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