Scientists vs Pump&Dump: will Machine Learning Help Combat Fraud?

Pump & dump is an old fraudulent scheme, originally used for making profits through the manipulation of the price of securities, has successfully taken root in the crypto-industry. Jiahua Xu and Benjamin Livshits from Imperial College London studied the features of pump&dump in digital asset markets and used machine learning to recognize fraud beforehand.

After the rollercoaster of Bitcoin in 2017, the number of projects wishing to repeat the success of the first cryptocurrency has now exceeded one thousand. Most, in the end, turned out to be useless and their tare and volume of trading asymptotically tend to zero.

Nevertheless, a sufficiently enterprising person will always be able to find application even to forgotten altcoin. First, you need to choose one of these and slowly, without attracting too much attention, start buying coins. Then you need to inform as many investors interested in easy earnings as possible that at certain times there will be a “pump” of some cryptocurrency. Many channels in Telegram, similar to Official McAfee Pump Signals (more than 12,500 members), were created specifically for this purpose.

At the chosen time, it is necessary to disclose the selected cryptocurrency and observe how crowds of people begin to frantically buy coins, because of which their rate soars to the moon. When the rate reaches the maximum value, the coins purchased in advance for cheap must be sold, exchanged for something more solid.

Those who figure out that the peak has been reached will have time to earn something. The rest, in the end, remain with “priceless” coins, the price of which falls below the initial value. The latter are usually the majority: in total, as the researchers showed, participants in pump&dump buy twice as many coins as they manage to sell.

All this happens very quickly, a matter of seconds, which can be seen on the example of the BVB cryptocurrency pump&dump on November 14:

19:30:04 – McAfee Pump Signals publishes the name of the coin, the price is 35 Satoshi;

19:30:05 – the first purchase of BVB coins;

19:30:23 – BVB price reaches a maximum 115 Satoshi.

Already after 19:33, the BVB rate fell below its original value. The graph of the exchange rate change BVB/BTC can be seen below.

With the help of their model, the researchers were able to correctly predict 5 of 6 pump&dump events, namely 8BIT, DRPU, ERY, EZT, TAJ; The XWC coin also showed suspicious behavior, but “pump” did not happen. The question now is this: who will evolve faster – scam schemes or models of self-learning machines?

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