What could go wrong in this booming new financial market where new cryptocurrencies were being traded on unregulated exchanges?
The Journal found investors have little-to-no protections against price manipulation by “pump groups” using “Wolf of Wall Street” style tactics to increase the value of their crypto holdings and unload them on unwitting investors. The Journal identified 175 schemes involving 121 different digital coins generating at least $825 million in trading activity during the first six months of 2018.
These schemes became more pervasive following the recent explosion in initial coin offerings—the securities-like digital tokens sold by startups to fundraise for projects. They follow a common pattern: announce a date, time and exchange for a pump; at the set time, announce, or “signal,” the coin being pumped; let the traders create a buying frenzy; then quickly sell. It can all happen in minutes, and successful traders publicly gloat about their profits.
What makes this project innovative?
Most cryptocurrency experts recognize that pump groups are a pervasive issue for traders and exchanges, but the Journal was the first organization to document the breadth of their activity. The Journal paired traditional shoe-leather reporting—inputting announcements into a spreadsheet—with exhaustive data collection efforts to track the prices of assets over time. The Journal also interfaced directly with exchanges to collect trading data as it happened to develop graphics that reconstructed the flurry of activity in real time. What was the impact of your project? How did you measure success? The Journal's methodology has since been cited in research papers and expanded upon by academics working to identify these events in real time. Legislation requiring exchanges to detect and stop such events is moving through the U.S. House of Representatives.
What was the impact of your project? How did you measure it?
Shane’s work has sparked widespread discussion on social media, followup coverage from other outlets and reform. For instance, his pieces covering cryptocurrency frequently climbed to the top of a popular tech news aggregator, were hotly debated among industry leaders on Twitter and cited by researchers.
Source and methodology
The Journal identified 105 groups offering trading "signals" on chat applications Telegram and Discord by collecting links from advertisements of "pump groups" posted to popular cryptocurrency message boards including Reddit and bitcointalk.org. The Journal on June 29 visited each Telegram or Discord link to determine if the group was still active and found 63 rooms with publicly accessible chat histories. While reviewing communications taking place since Jan. 1, the Journal collected the name of cryptocoins mentioned in messages sent by moderators directing followers to trade at a specific date and on a single exchange. The Journal then downloaded pricing, volume and market capitalization data at five-minute intervals from CoinMarketCap.com between Jan. 1 and Aug. 2. The Journal found 121 different digital coins mentioned in chat logs with corresponding trading data found on CoinMarketCap.com among 175 messages directing participants to trade. To determine additional volume, price performance and gains or losses in market capitalization, the Journal compared changes in trading data from two hours prior to a "pump signal" against data from two hours after. Additionally, the Journal downloaded trading data of every bitcoin pair listed on Binance at one-minute intervals directly from the exchange on July 1 and July 4, the dates Big Pump Signal traded Cloakcoin and Nexus. The Journal analyzed the trading data for changes in price and volume an hour before and after the "pump signal" was posted to Telegram.
Paul Vigna and Shane Shifflet