Researchers Use Machine Learning to Find Crypto Pump & Dumps Before They Happen

Justine Pope
  • Researchers in the United Kingdom used machine learning to find pump and dump scams in the cryptocurrency market.
  • By looking for unusual buying activity, the algorithm was able to identify five coins that pumped over 100%.

Researchers from the United Kingdom have decided to study one of cryptocurrency’s worst diseases: the pump and dump scam. Now that there are almost 2,000 cryptocurrencies on the market, scammers have a plethora of options for choosing targets for pumping and dumping.

To fight back, these researchers set out to determine how pump and dumps work, and see if they could identify them before they begin. Jiahua Xu and Benjamin Livshits from the Imperial College London wrote a paper called, “The Anatomy of a Cryptocurrency Pump-and-Dump Scheme.” Inside this paper, they use machine learning to try to identify pump and dump scams before they happen.

A pump and dump scam is a form of insider trading. Pump and dumps have existed across all markets, but due to cryptocurrency’s low liquidity and easy access, this market has become ripe for scams. Things got so bad that earlier this year, the US Commodity Futures Trading Commission (CFTC) issued a warning about cryptocurrency pump and dumps, and even offered bounties for pump and dump organizers.

Earlier this year, CryptoGlobe revealedsocial media influencers were organizing cryptocurrency pump and dump schemes. These were reported to the SEC and the FBI by the community after being exposed by a Steemit user.

To learn about pump and dumps, the researchers studied previous pump and dumps to find trends. “Xu and Livshits say that on average there are two pump-and-dump scams every day and that these generate about $7 million worth of trading volume a month.”

After collecting data, the research team found that unusual buying volume frequently appeared before the pump, indicating the the organizers were buying. So, the team built a machine learning algorithm that would find unusual buying volume, believing that the volume would lead to a pump.

They put their algorithm to the test - and it worked. The program identified six cryptocurrencies that were about to pump. Of those six, five of them went up over 100%, and one did not see much growth. Five out of six is an excellent hit rate, so the experiment was a definite success.

How Pump And Dumps WorK

Here’s how a pump and dump is accomplished. First, the organizers select a little-known cryptocurrency. The smaller the better, because larger coins will take more money to move the market. Little coins (with less volume) can be manipulated with ease.

Next, the organizers slowly accumulate the coin of choice, so that they can make sure they have a position before the masses. They then alert their followers of the date and time of the pump, so they can all be ready. Once the time comes, the organizers announce the coin that will be pumped, and usually include a pump target.

Then the pump happens, and the price skyrockets as speculators dive in trying to ride the wave. Usually, price ends the pump with a dump, where it returns back to its starting point, leaving some traders holding the bag. The entire cycle is over within minutes.

To learn more, click here to read a summary of the paper from MIT Technology Review, or click here to read the entire research paper.

Major Bitcoin Wallets Could Be Vulnerable to Double-Spend Attacks

Francisco Memoria

Researchers from cryptocurrency startup ZenGo, which is building a mobile cryptocurrency wallet, found major cryptocurrency wallets could be vulnerable to double-spend attacks.

ZenGo’s researchers tested the vulnerability, dubbed BigSpender, on major wallets like Edge, BRD, and Ledger and found that leveraging Bitcoin’s Replace-by-Fee feature it could be possible to double-spend funds. Replace-by-Fee lets a user send a bitcoin transaction with a low fee, and send the same bitcoin in another transaction with a higher fee.

The original transaction is canceled when this is done, and replaced by the second one which is confirmed on the network faster as miners prioritize it thanks to the higher fee. If a cryptocurrency wallet accepts unconfirmed transactions too quickly, for a user it may look like they’ve received the funds while they are still being sent. If the attacker moves the funds to another wallet with a higher transaction fee the initial transaction is canceled, even though the user sees the funds in its balance.

BigSpender can even be used multiple times. If an attacker wants to buy something that costs 1 BTC, it can send 10 transactions of 0.1 BTC each. The recipient would see it received 1 BTC in the wallet, but the attacker could then move the 0.1 BTC to another address.

Because the recipient’s wallet would have a miscalculated balance, attackers could also freeze the funds in it using a denial-of-service-attack. The victim would only see the real balance on its wallet after resyncing it with the Bitcoin blockchain – an option that would likely be considered after some confusion.

BigSpender, it’s worth noting, is not a vulnerability in the Bitcoin protocol as it doesn’t let attackers steal bitcoins. The vulnerability can be used to confuse users and scam them out of goods and services instead.

ZenGo disclosed the vulnerability with Edger, BRD, and Ledger 90 days ago, and received a Bug Bounty from Ledger and BRD. Both firms have already fixed the issue. Ledger’s VP of Marketing, Benoît Pellevoizin, said in a blog post:

Everything has been fixed in the most recent update that was released two days ago.

Pellevoizin added that unconfirmed transactions are now highlighted, and a message informs users there are unconfirmed transactions. Ledger Live, he added, does not use funds from unconfirmed transactions when sending funds.

ZenGo has released an open-source tool for users to test their wallets against BigSpender.

Featured image via Pixabay.