New Study Highlights Price Manipulation, Scams and Fraud in Crypto Market

New Study Highlights Price Manipulation, Scams and Fraud in Crypto Market

by December 19, 2018

A new report by finance and accounting professor Paul Barnes released in November 2018 explores the cryptocurrency market, highlighting its susceptibility to speculative bubbles, manipulation, scams and fraud.

The paper, which was presented at a blockchain and cryptocurrency conference organized by the University of Sydney Business School on November 9, argues that the largely unregulated nature of the cryptocurrency market and the desire for privacy by founders, owners and developers, have made accountability and disclosure requirements either minimal or non-existent, leading to the manipulation of cryptocurrency prices, volumes and market capitalization information.


Price and volume manipulation

Image: Price chart,

Image: Price chart,

Many forms of cryptocurrency frauds and scams exist, most of which leverage the anonymity involved in online trading and blockchain technology to make it difficult to trace the fraudsters.

But most frauds and scams in the space actually involve market abuse whether in the form of the manipulation of prices through pump-and-dump schemes or initial coin offerings (ICOs) which are usually either Ponzi schemes or simple frauds, the report claims.

In a pump-and-dump scheme, promoters “pump” up the price, creating a speculative frenzy, then “dump” some of their holdings at the artificially inflated price. Organizers openly use social media to promote the cryptocurrency.

Prices may also be affected by bots, it says, a recent case being “harassing bots.” These would post an order to sell a cryptocurrency at a price lower than what other sellers were offering, prompting traders to try to make a buy. However, immediately before traders completed the purchase, the bot would cancel its sell order. As a result, buy orders are posted, raising the cryptocurrency’s price on other exchanges.

In addition to price manipulation, volume data are often reported incorrectly in order to raise the visibility and credibility of a cryptocurrency or exchange, the report says. Coinmarketcap, for instance, has been called out for bloating volume numbers. A report released in August 2018, found that over 70% of the top 100 cryptocurrency exchange on Coinmarketcap were engaging in excessive wash trading from three to thousands of times their stated volume.


ICO frauds and scams

The report also argues that most ICOs are actually fraudulent. It cites a Wall Street Journal report released in May that found that nearly one in five ICOs contained “red flags,” whether that’s plagiarized investor documents, promises of guaranteed returns, and missing or fake executive teams.

A separate research by the Satis Group published earlier this year found that four out of five ICOs were scams. Meanwhile, EY estimated in December 2017 that 10% of the money raised from ICOs was effectively lost or stolen in hacker attacks.

A relevant example is the OneCoin Ponzi scheme. OneCoin used a marketing approach in which customers bought “educational products” and received tokens to mine a “cryptocurrency.” In order to earn more “tokens,” customers needed to recruit others to join OneCoin, and so on.

OneCoin ran into trouble with financial regulators in various countries around the world and several arrests of OneCoin members, promoters and investors, have already been made, notably in China and India.


Hacking attacks

Image: Hacking, cybercrime,

Another consequence of the lack of regulation in the cryptocurrency space is the magnitude of thefts, both in terms of frequency and size.

According to the report, bitcoin has been subject to over 40 thefts, largest ones being the Mt. Gox heist (US$480 million), the Bitfinex hack (US$72 million) in 2016, and the NiceHash hack (US$62 million) in 2017.

In January 2018, Coincheck suffered the world’s largest cryptocurrency theft, resulting in US$530 million worth of NEM tokens being stolen.

Other forms of cybercrimes involving cryptocurrencies include what is known as ransomware, a type of program that encrypts files stored on a computer or mobile device in order to extort money, and cryptojacking, which refers to the unauthorized use of someone else’s computer to mine cryptocurrency.

The report concludes that regulation and improved accountability are needed to build trust in the nascent yet rapidly evolving cryptocurrency market. It compares the current state of the industry to e-business in the 1990s in the UK when the confidence of both business and consumers to do e-business was minimal and the Internet likened to a jungle.


Featured image: Crypto Bitcoin,