The Economics of Cryptocurrency Pump and Dump Schemes

19 Pages Posted: 3 Jan 2019

See all articles by JT Hamrick

JT Hamrick

University of Tulsa - Tandy School of Computer Science

Farhang Rouhi

University of New Mexico - Computer Science Department

Arghya Mukherjee

University of Tulsa - Tandy School of Computer Science

Amir Feder

Technion-Israel Institute of Technology

Neil Gandal

Berglas School of Economics, Tel Aviv University; Centre for Economic Policy Research (CEPR)

Tyler Moore

University of Tulsa - Tandy School of Computer Science

Marie Vasek

University of New Mexico - Computer Science Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 18, 2018

Abstract

The surge of interest in cryptocurrencies has been accompanied by a proliferation of fraud. This paper examines a pervasive tactic long known to financial markets: pump and dump schemes. While the fundamentals of the ruse have not changed in the last century, the recent explosion of nearly 2,000 cryptocurrencies in a largely unregulated environment has greatly expanded the scope for abuse. The paper first quantifies the scope of cryptocurrency pump and dump on Discord and Telegram, two widely popular group messaging platforms with 130 million users and 200 million users respectively. Both platforms can handle large groups with thousands of users, and they are the most popular outlets for pump and dump schemes involving cryptocurrencies. We identified 3,767 different pump signals advertised on Telegram and another 1,051 different pump signals advertised on Discord during a six-month period in 2018. The schemes promoted more than 300 cryptocurrencies. This comprehensive data provides the first measure of the scope of pump and dump schemes across cryptocurrencies and suggest that this phenomenon is widespread and often quite profitable. This should raise concerns among regulators. We then examine which factors that affect the “success” of the pump, as measured by the percentage increase in price near the pump signal. We find that the coin’s rank (market capitalization/volume) is the most important factor in determining the profitability of the pump: pumping obscure coins (with low volume) is much more profitable than pumping the dominant coins in the ecosystem.

Suggested Citation

Hamrick, JT and Rouhi, Farhang and Mukherjee, Arghya and Feder, Amir and Gandal, Neil and Moore, Tyler and Vasek, Marie, The Economics of Cryptocurrency Pump and Dump Schemes (December 18, 2018). Available at SSRN: https://ssrn.com/abstract=3303365 or http://dx.doi.org/10.2139/ssrn.3303365

JT Hamrick

University of Tulsa - Tandy School of Computer Science ( email )

E 5th Pl
Tulsa, OK 74104
United States

Farhang Rouhi

University of New Mexico - Computer Science Department ( email )

MSC01 1130
1 University of New Mexico
Albuquerque, NM 87131
United States

Arghya Mukherjee

University of Tulsa - Tandy School of Computer Science ( email )

E 5th Pl
Tulsa, OK 74104
United States

Amir Feder

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Neil Gandal (Contact Author)

Berglas School of Economics, Tel Aviv University ( email )

Tel Aviv University
Tel Aviv 69978
Israel
+972 3 640 9907 (Phone)
+972 3 640 9908 (Fax)

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tyler Moore

University of Tulsa - Tandy School of Computer Science ( email )

E 5th Pl
Tulsa, OK 74104
United States

Marie Vasek

University of New Mexico - Computer Science Department ( email )

MSC01 1130
1 University of New Mexico
Albuquerque, NM 87131
United States

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