Researchers Develop an Algorithm to Detect Crypto Scams Before They Happen

Pump and dump schemes, wherein an actor will buy a large amount of a crypto coin in order to artificially increase the price, have been a problem in cryptocurrency since its inception. Of course, this problem isn’t new, it’s something the stock market has had to navigate for a while, but none the less it has been a prominent problem in crypto markets also.

In February of this year, the US Commodity Futures Trading Commission released a warning, alerting potential investors about these scams. Cryptocurrency is often seen as an attractive venture for criminals for a few reasons. Cryptocurrency is relatively new, so it’s fair to say most investors are inexperienced in the area and aren’t confident in what to expect. Fraudsters can exploit this vulnerability in order to take advantage of investors and manipulate the market. The anonymous nature of crypto is also attractive to criminals, of course.

How exactly these schemes are operated is not known in any great detail. That is until two students are Imperial College London studied pump and dump schemes in depth to figure out how they work. The pair studied over 236 pump and dump schemes that took place between July 21 and November 18 of 2018 and analyzed the data to figure out how they operate. The researchers have managed to take their findings and produce an algorithm that can actually predict when a pump and dump scheme is about to occur. This is a major breakthrough and has the potential to be invaluable in the quest to stabilize the cryptocurrency market.

The researchers, Xu, and Livshits found that on average there are two pump and dump schemes executed every day that generate $7 million worth of trading volume. When a pump and dump occurs, it can happen extremely quickly, with only minutes between a digital coin reaching its peak and the actors cashing out, leaving many unsuspecting people with little to show for their investment.

Although this is exciting news, it doesn’t mean game over for pump and dump schemes anytime soon. Any algorithm created will encourage actors to find new and unique ways around the problem so that they can continue to manipulate the market. However, this does signify that there is work going on in the crypto space to stabilize the market and make criminals unwelcome in the space. As crypto continues to press forward into the mainstream we should see more tech solutions to crypto scams.