Cryptocurrency Pump-and-Dump Schemes

58 Pages Posted: 23 Oct 2018 Last revised: 5 Aug 2022

See all articles by Tao Li

Tao Li

University of Florida - Department of Finance, Insurance and Real Estate

Donghwa Shin

University of North Carolina at Chapel Hill, Kenan-Flagler Business School

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: February 10, 2021

Abstract

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

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

Tao Li (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

Donghwa Shin

University of North Carolina at Chapel Hill, Kenan-Flagler Business School ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States
6096137699 (Phone)

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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