Work

A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets

Year: 2022

Type: article

Abstract: We investigate the puzzle of widespread participation in cryptocurrency pump-and-dump manipulation schemes. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes. Analyzing a sample of 355 cases in 6 months, we find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants.

Source: European Finance Review

DOI: 10.1093/rof/rfac051

Authors: Anirudh Dhawan, Tālis J Putniņš

Institutions: University of Technology Sydney, Indian Institute of Management Bangalore, Stockholm School of Economics in Riga

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: Australian Research Council

Award: The failings of financial markets