How AI Bots Detect Pump-and-Dump Schemes

6 min read . Mar 26, 2025

The anatomy of crypto pump-and-dump schemes

A typical cryptocurrency pump-and-dump operation follows a well-defined pattern. Organizers first select a relatively unknown coin with low market capitalization and trading volume, making it easier to manipulate. They then coordinate through messaging platforms like Telegram or Discord to build anticipation for an upcoming "pump event."

The scheme unfolds in distinct phases: first, administrators announce the date, time, and exchange for the pump without revealing the target coin. As the event approaches, they post reminders with increasing frequency. At the designated moment, they disclose the coin's identity, triggering a buying frenzy.

Within minutes of the announcement, trading volume spikes dramatically while prices can surge by double or triple-digit percentages. The orchestrators, who purchased the coin beforehand, sell their holdings into this artificial demand, causing prices to collapse almost as quickly as they rose.

A real-world example occurred on September 8, 2019, when a Telegram group orchestrated a pump of Streamr DATAcoin, causing the price to spike and then rapidly fall within minutes.

Market data monitoring: The primary detection method

AI bots excel at monitoring market data, which forms the foundation of effective pump-and-dump detection. These systems continuously track multiple market indicators that typically exhibit abnormal patterns during manipulation events.

Price movement analysis forms the cornerstone of detection. AI systems monitor for sudden, sharp price increases that deviate significantly from historical trends. These algorithms calculate volatility metrics and compare them against established baselines to identify suspicious activity.

Trading volume serves as another critical indicator. AI bots look for abrupt spikes in transaction volume that don't correspond with broader market movements or significant news. The systems measure the ratio between current and average historical volume, flagging anomalies that exceed predetermined thresholds.

Order book analysis provides further detection capability. Bots examine the bid-ask spread and order depth, identifying unusual patterns like sudden order placement or cancellation that may indicate coordinated action.

Time-series analysis ties these signals together. AI systems recognize that pump-and-dump schemes follow distinctive temporal patterns – preparation, pump announcement, rapid price increase, and eventual collapse – often completing within 30-60 minutes. By modeling these sequences, detection systems can distinguish manipulated movements from legitimate market activity.

Social signal analysis: Uncovering coordination

While market data reveals the effects of manipulation, social signal analysis helps AI bots uncover the coordination behind pump-and-dump schemes. These systems employ natural language processing to monitor conversations across Telegram, Discord, Twitter, and other platforms where schemes are typically organized.

AI bots scan for specific linguistic patterns and terminology associated with pump activities. They identify phrases like "huge pump coming," "next moon shot," or "free for all" that frequently appear in promotional messages. More sophisticated systems detect subtle language patterns that might escape human notice.

Temporal analysis of message frequency and timing helps identify the buildup to pump events. AI systems flag increasing message velocity and shortened intervals between announcements that typically precede target coin revelation.

Network analysis maps connections between accounts and channels promoting the same coins. By examining message propagation patterns, AI can identify coordinated campaigns spanning multiple platforms and distinguish between organic discussions and artificial hype.

The integration of these social signals with market data significantly enhances detection accuracy, allowing for earlier intervention before significant price distortion occurs.

Machine learning models in action

Advanced machine learning models form the heart of pump-and-dump detection systems. These models combine market and social data inputs to identify manipulation with increasing accuracy and decreasing false positives.

Random Forest algorithms have proven particularly effective for classification tasks in this domain. These ensemble methods examine multiple decision trees simultaneously, evaluating features like price volatility, volume surges, and message patterns to distinguish legitimate market activity from manipulation. Their strength lies in handling the imbalanced datasets typical in pump detection, where fraudulent events are significantly outnumbered by normal trading activity.

Neural network architectures provide even more sophisticated detection capabilities. Recurrent Neural Networks (RNNs) and Long Short-Term Memory (LSTM) models excel at processing sequential data, making them well-suited for analyzing the temporal patterns of pump-and-dump schemes. These approaches can identify subtle relationships between social media signals and subsequent market movements.

Random Under-Sampling and Over-Sampling techniques help balance training data
Feature engineering focuses on time-window statistics of price and volume
Cross-validation ensures models remain effective across different market conditions
Ensemble methods combine multiple models to improve overall accuracy

Research has demonstrated that these models can achieve impressive results. In studies by Fantazzini and Xiao, properly trained algorithms detected pump schemes with accuracy rates exceeding 80%, while other research has shown success in predicting target coins before their announcement.

The most effective systems employ hybrid approaches, combining rule-based anomaly detection for real-time alerts with sophisticated machine learning models for deeper analysis and prediction of future manipulation attempts.

Advanced AI techniques for prediction

Beyond detecting ongoing manipulation, the most sophisticated AI systems attempt to predict pump-and-dump schemes before they fully materialize. These predictive capabilities represent the cutting edge of market protection.

Target coin prediction uses historical patterns to identify cryptocurrencies most likely to be selected for upcoming pumps. AI models analyze characteristics like market capitalization, trading volume, and previous manipulation attempts to rank potential targets. Research by Nghiem and colleagues demonstrated that neural network-based architectures could forecast pump targets with meaningful accuracy by examining market signals in the hours preceding announcements.

Price impact prediction estimates the potential magnitude of price manipulation once a target is announced. These models can forecast peak prices within narrow error margins – some studies report accuracy within 6.1% – by analyzing factors like channel size, coin liquidity, and historical pump performance.

Temporal prediction attempts to anticipate not just what coins will be pumped, but when these events might occur, allowing for preemptive monitoring of suspicious activity.

Limitations and challenges for AI detection systems

Despite their sophistication, AI detection systems face significant challenges. The most formidable is the invisibility of private communications. As researchers note, "A key challenge is uncovering manipulation campaigns coordinated in private channels and messaging apps." While public Telegram groups can be monitored, encrypted platforms provide safe havens for coordination.

False positive management remains another substantial hurdle. Market volatility can sometimes mimic manipulation patterns, potentially triggering unnecessary alerts that overwhelm human overseers.

Technical constraints also limit effectiveness. The short-lived nature of pump events requires extremely rapid data collection and processing, while API rate limits restrict access to real-time market data, particularly at the granular level needed for optimal detection.

Conclusion

The battle against cryptocurrency pump-and-dump schemes represents a technological arms race that continues to evolve. As detection systems grow more sophisticated, manipulators adapt their tactics to evade discovery.