Cryptocurrency Pump-and-Dump Schemes

Pump-and-dump schemes (P&Ds) pervade the cryptocurrency market. We find that P&Ds trigger short-term episodes featuring dramatic increases in prices, volume, and volatility. Prices peak within minutes and quick reversals follow. The evidence we document, including price run-ups before P&Ds start, implies that significant wealth transfers between insiders and outsiders occur. Exploiting two natural experiments in which exchanges altered their P&D policies, we show that P&Ds are detrimental to cryptocurrency liquidity and prices. Interestingly, gambling and overconfident investors often participate in P&Ds and some investors exhibit naïve reinforcement learning. We also describe how our findings shed light on manipulation theories.

Keywords: Pump-and-dump scheme, manipulation, cryptocurrency, overconfidence, gambling

JEL Classification: G14, G18, G28, G41

Suggested Citation: Suggested Citation

Li, Tao and Shin, Donghwa and Wang, Baolian, Cryptocurrency Pump-and-Dump Schemes (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3267041 or http://dx.doi.org/10.2139/ssrn.3267041