Cryptocurrency Pump-and-Dump Schemes

60 Pages Posted: 23 Oct 2018 Last revised: 19 Nov 2018

See all articles by Tao Li

Tao Li

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

Donghwa Shin

Princeton University - Department of Economics, Bendheim Center for Finance

Baolian Wang

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

Date Written: September 30, 2018

Abstract

Pump-and-dump schemes (P&Ds) are pervasive in the cryptocurrency market. We study these events using trade-by-trade data and a sample of P&Ds with precisely identified starting times. We find that P&Ds lead to short-term cryptocurrency bubbles featuring dramatic increases in prices, volume, and volatility. Prices peak within minutes and a quick reversal follows. The evidence we document, including a significant price run-up before the start of a P&D, implies that significant wealth transfers between potential insiders and outsiders occur. Bittrex, a cryptocurrency exchange, banned P&Ds on November 24, 2017. Using a difference-in-differences approach, we provide causal evidence that P&Ds are detrimental to the liquidity and price of cryptocurrencies. We discuss potential mechanisms that might explain why outsiders are willing to participate and describe how our findings shed light on theories of manipulation.

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 (September 30, 2018). Available at SSRN: https://ssrn.com/abstract=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

Princeton University - Department of Economics, Bendheim Center for Finance ( email )

Princeton, NJ
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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