Crypto Fraud and Investing Behavior

47 Pages Posted: 8 Dec 2023 Last revised: 26 Mar 2024

See all articles by Ben Lourie

Ben Lourie

University of California, Irvine

Alex Nekrasov

University of Illinois Chicago

Phong Truong

Pennsylvania State University

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business

Date Written: November 30, 2023

Abstract

This study examines the direct impact of fraud on its victims’ investing behavior in the context of cryptocurrency markets. We gauge investing behavior using unique transaction-level data capturing individuals’ money transfers to crypto trading platforms. Employing a difference-in-differences design based on the 2021 Coinseed fraud revelation, we find strong evidence that crypto platform fraud leads to substantial erosion of trust among defrauded investors. Compared to other investors, fraud victims curtail new investments on other crypto platforms (in addition to the fraudulent platform). The effect is both large and persists for at least one year. Consistent with investors with higher financial literacy updating their priors more fully, the effect of fraud is stronger for individuals with traditional capital market investment experience, higher income, and news subscriptions. Furthermore, we observe spillover effects on other markets: crypto fraud induces its victims to reduce new investments on traditional brokerage platforms. Overall, our findings provide novel micro-level insights into the effects of investor personal experiences of crypto fraud on their investing behavior.

Keywords: fraud, crypto markets, cryptocurrency, individual investors, trust, capital markets, transaction data

JEL Classification: G10, G40, G50, M40, D10, D90

Suggested Citation

Lourie, Ben and Nekrasov, Alexander and Truong, Phong and Zhu, Chenqi, Crypto Fraud and Investing Behavior (November 30, 2023). Available at SSRN: https://ssrn.com/abstract=4650849 or http://dx.doi.org/10.2139/ssrn.4650849

Ben Lourie

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States

Alexander Nekrasov (Contact Author)

University of Illinois Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

HOME PAGE: http://business.uic.edu/profiles/alexander-nekrasov/

Phong Truong

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States
16802 (Fax)

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

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