USC ISI researchers track crypto pump-and-dump operations on social media – USC Viterbi

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The practice is unethical, but still not illegal according to the SEC. Cryptocurrency scammers have found a way to make money quickly via social media platforms such as Twitter and Telegram, using the pump and dump method. In short: they buy coins when the price is low, band together to create buzz and make the price of this coin rise, and then sell theirs at a profit.

Researchers at the USC’s Information Sciences Institute (ISI) have conducted a study to track and shut down this phenomenon.

Mehrnoosh Mirtaheri, a trained research assistant at ISI who led this work, began analyzing tweets related to the stock market – where pumping and dumping operations are illegal – and then shifted the focus to cryptocurrencies. “These coins are not regulated at all, there is no control, so many people are trying to manipulate the price by using social media to create false hype about them,” Mirtaheri said, adding that she saw an opportunity to increase the awareness around this. questionable practice.

The modus operandi is always the same.

“The attack starts with a group of people buying a certain coin, then they send messages to Telegram channels to make a larger group aware of the pumping and dumping operation, with instructions to buy and sell when it reaches a certain price,” she so. “They buy all the coin, create enthusiasm for it, the price goes up, then they dump all the coin at once, and make money on it: the delta between the buying and selling price. People who do not participate in the scam end up losing a lot of the investment sine. »

These operations are performed on coins with small volumes, so that a small group of traders can have an impact on their price. For popular coins like Bitcoin, it will take someone with a massive fan base to increase or decrease the value.

The scammers “are also recruiting gullible participants on Twitter to help them pump the coins, and using robots to amplify the phenomenon,” Mirtaheri added.

About 80% of the calls were initiated by them. These robots were easy to identify when Mirtaheri conducted her research: “Many Twitter accounts were clearly fake: they all had a picture of a dog as a profile picture, and they were created at the same time,” she said.

Fred Morstatter, head of the ISI research team and research assistant professor at USC who also worked on this project, is furious at this practice.

“Pump and dump schemes are scams, they are meant to scam average people for their assets. In the context of more traditional securities such as stocks, it is very illegal, he said. But it is not well regulated when it comes to cryptocurrency, it is not explicitly illegal. “

Their algorithm analyzed calls and tweets and alerted them when a pumping and dumping operation was about to take place.

Sami Abu-El-Haija, a USC PhD candidate who also worked on this project, said they wanted to “correlate the tweets and fluctuations in cryptocurrency to see if the price was affected by social media.”

It turned out that it was. Very good.

“Every time there was a spike, we started looking at what people were saying about these coins around the time of the spike, before and after,” Abu-El-Haija said. “We created a machine learning model that could consume social signals, identify patterns and analyze this data, and we saw the cluster of people communicating with each other.”

The USC ISI-led researchers also showed that a smaller group of people were directly connected because they dumped their coins a little earlier than everyone else, started the coin fall and made the biggest profit.

So where do we go from there? Mirtaheri’s goal is to help small investors.

“We should use this research to create an alert system for individuals, to show them the likelihood of a coin being pumped, so that they can be careful when buying it,” she said, adding that this could take the form of an app. .

Morstatter agrees: “I would like to see our work help the average person. If they had an awareness that the value behind the coin they buy is not legitimate, they could have made better decisions. That’s the playoffs, he said.

“The FTC does not want the bandwidth to stop and arrest everyone behind every pumping and dumping operation. If a person could have a feeling that this is a scam, that would be great.”

Morstatter believes that banks can offer this tool to their customers. Mirtaheri also mentioned services like PayPal that are starting to enable crypto trading on their platform.

“Pump and dump schemes fall under the jurisdiction of the SEC or CFTC, depending on the specific asset in question. However, the FTC has jurisdiction to investigate misleading allegations and unfair practices related to cryptocurrency investments, and we are interested in understanding how cryptocurrency fraud spreads. on social media, ”the FTC explained to USC.

Aram Galstyan, research professor of computer science and lead researcher at the USC Information Sciences Institute, pointed out that “the cryptocurrency market is not regulated by the Securities and Exchange Commission (SEC) or any other agency that produces a breeding ground for all types of manipulations. The research presented in the article may help build tools to monitor markets and generate alerts when a suspected pump and dump unfolds. “

As of June 2022, the SEC, the state regulatory body investigating securities fraud such as insider trading and pump and dumps, had no plans to implement cryptocurrencies, much to the displeasure of Hester Peirce, the Securities and Exchange Commissioner. Peirce accused the US government of being apathetic on the subject in an interview with CNBC, saying: “There is a lot of fraud in this area, because it is the hot area at the moment. [What] what worries me is the way we have somehow dropped the regulatory ball. ” Contacted by USC, the SEC did not want to comment on this matter.

Greg Ver Steeg, associate professor of USC Viterbi research in informatics and senior research leader at ISI, believes that the methodology used in this research can help fix broader problems.

“Increasingly, we are seeing individuals, companies and states trying to use social media to manipulate users for their own purposes. Identifying these schemes is a necessary first step towards reducing the potential harm.”

This work “Identifying and Analyzing Cryptocurrency Manipulations in Social Media” was published in IEEE Transactions on Computational Social System in June 2021.

Published July 6, 2022

Last updated July 6, 2022