Researchers Used Machine Learning to Effectively Predict Pump and Dump Scams

Two researchers from the Imperial College of London have developed a system capable of predicting with a high margin of success the possibilities of a Pump and Dump before it occurs.

Jiahua Xu and Benjamin Livshits studied the behavior of capital flows in various exchanges and were able to create a model that uses artificial intelligence to determine when a coin might be about to be pumped given an unusual behavior in purchase orders.

To correlate data, the researchers subscribed to several groups (usually Telegram) specialized in promoting Pump and Dumps. According to the research, their model is successful because the people behind the announcements actually scam their subscribers, previously buying the cryptocurrency and then selling it at extremely high prices during the “pump.”

Pump And Dump: A Scam That Works Based on the “Greater Fool Theory”

Researchers say this type of action succeeds even though people know they’re being scammed because victims believe they’ll be able to rip off someone else. This is known as the greater fool theory.

“It is generally known to pump participants that admins benefit the most from a pump. Most of the time, the admin is able to sell their pre- hoarded coins at an inflated price to other group members during a pump. So why are there still people enthusiastic about partaking a pump, given the risk of being ripped off by the admins? Because people believe that there are greater fools out there, who would buy the coins at an even higher price than their original purchase price. The greater fool theory also forms the foundation of many other schemes, such as pyramid scams or Ponzi games.”

In the research, scientists comment that there are usually several groups involved in the scam and that although they should theoretically promote the pump at the same time so that all participants have the same chances of success, there is always a delay in the announcements, so the members of the group that received the “signal” with seconds of delay usually lose their money or end up hodling a virtually worthless coin.

AI Predicts Pumps Because Promoters Buy The Coin First

According to the results shown by the study, after developing a system to analyze the data, they obtained six suggestions, of which five resulted in a pump. With this analysis, they earned a gain of 79.5% in 3 weeks.

These results are quite impressive; however, it is well known that in these schemes, the only winner is the promoter. In 2017 Business Insider published an interview in which the administrator of a Pump and Dump group claims to have obtained hundreds of thousands of dollars in profits with this dishonest practice.

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