The Anatomy of a Cryptocurrency Pump-and-Dump Scheme
It addresses market manipulation detection for cryptocurrency traders and regulators, though it is incremental as it applies existing methods to a new domain.
This paper tackles the problem of detecting cryptocurrency pump-and-dump schemes by analyzing 412 activities from Telegram channels and building a predictive model, which achieved a 60% return in 2.5 months in a trading strategy.
While pump-and-dump schemes have attracted the attention of cryptocurrency observers and regulators alike, this paper represents the first detailed empirical query of pump-and-dump activities in cryptocurrency markets. We present a case study of a recent pump-and-dump event, investigate 412 pump-and-dump activities organized in Telegram channels from June 17, 2018 to February 26, 2019, and discover patterns in crypto-markets associated with pump-and-dump schemes. We then build a model that predicts the pump likelihood of all coins listed in a crypto-exchange prior to a pump. The model exhibits high precision as well as robustness, and can be used to create a simple, yet very effective trading strategy, which we empirically demonstrate can generate a return as high as 60% on small retail investments within a span of two and half months. The study provides a proof of concept for strategic crypto-trading and sheds light on the application of machine learning for crime detection.