Cryptocurrency Pump-and-Dump Schemes

Pump-and-dump schemes (P&Ds) are pervasive in the cryptocurrency market. We find that P&Ds lead to short-term bubbles 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 significant wealth transfers between insiders and outsiders. 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 why outsiders are willing to participate and describe how our findings shed light on manipulation theories.

[1]  Milton Friedman,et al.  Essays in Positive Economics , 1954 .

[2]  Lawrence Harris,et al.  Estimating the components of the bid/ask spread , 1988 .

[3]  Charles M. C. Lee,et al.  Inferring Trade Direction from Intraday Data , 1991 .

[4]  Robert A. Jarrow,et al.  Market Manipulation, Bubbles, Corners, and Short Squeezes , 1992, Journal of Financial and Quantitative Analysis.

[5]  Franklin Allen,et al.  Stock-Price Manipulation , 1992 .

[6]  L. Harris.  Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes , 1994 .

[7]  Avanidhar Subrahmanyam,et al.  Market microstructure and asset pricing: On the compensation for illiquidity in stock returns , 1996 .

[8]  Terrance Odean,et al.  Learning to Be Overconfident , 1997 .

[9]  Brad M. Barber,et al.  Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment , 1998 .

[10]  P. Mahoney,et al.  The stock pools and the Securities Exchange Act 1 I thank two anonymous referees, the editor, Willia , 1999 .

[11]  Stephen E. Wilcox.  Investor Psychology and Security Market Under- and Overreactions , 1999 .

[12]  Brad M. Barber,et al.  Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors , 2000 .

[13]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[14]  Wei Xiong,et al.  Overconfidence and Speculative Bubbles , 2003, Journal of Political Economy.

[15]  A. Khwaja,et al.  Unchecked Intermediaries: Price Manipulation in an Emerging Stock Market , 2005 .

[16]  Guojun Wu,et al.  Behavior Based Manipulation: Theory and Prosecution Evidence , 2004 .

[17]  Jianping Mei,et al.  Market Manipulation: A Comprehensive Study of Stock Pools , 2004 .

[18]  Gur Huberman,et al.  Price Manipulation and Quasi-Arbitrage , 2004 .

[19]  Ming Huang,et al.  Stocks as Lotteries: The Implications of Probability Weighting for Security Prices , 2007 .

[20]  John J. Merrick,et al.  Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze ☆ , 2005 .

[21]  Neil D. Pearson,et al.  Stock Price Clustering on Option Expiration Dates , 2004 .

[22]  Irrational Exuberance.  Irrational exuberance? , 2006, Nature Biotechnology.

[23]  Rajesh Aggarwal,et al.  Stock Market Manipulations , 2006 .

[24]  J. Stein,et al.  Disagreement and the Stock Market , 2007 .

[25]  Alok Kumar.  Who Gambles in the Stock Market? , 2008 .

[26]  S. Viswanathan,et al.  How to Define Illegal Price Manipulation , 2008 .

[27]  A. Shleifer,et al.  Salience Theory of Choice Under Risk , 2010 .

[28]  C. Snider,et al.  Does the LIBOR Reflect Banks' Borrowing Costs? , 2010 .

[29]  Augustin Landier,et al.  Do Hedge Funds Manipulate Stock Prices? , 2012 .

[30]  N. Barberis.  The Psychology of Tail Events: Progress and Challenges , 2013 .

[31]  E. Fama,et al.  Two Pillars of Asset Pricing , 2013 .

[32]  T. Moore,et al.  Bitcoin: Economics, Technology, and Governance , 2014 .

[33]  T. Wang,et al.  Corporate Scandals and Household Stock Market Participation , 2014 .

[34]  N. Barberis,et al.  Prospect Theory and Stock Returns: An Empirical Test , 2016 .

[35]  Tālis J. Putniņš,et al.  Dark Trading and Price Discovery , 2015 .

[36]  Have We Solved the Idiosyncratic Volatility Puzzle? , 2015 .

[37]  Kewei Hou,et al.  Have We Solved the Idiosyncratic Volatility Puzzle? , 2015 .

[38]  J. Gans,et al.  Some simple economics of the blockchain , 2016, Commun. ACM.

[39]  S. Athey,et al.  Bitcoin Pricing, Adoption, and Usage: Theory and Evidence , 2016 .

[40]  Umit G. Gurun,et al.  Trust Busting: The Effect of Fraud on Investor Behavior , 2017 .

[41]  Baolian Wang.  Probability Weighting and Asset Prices: Evidence from Mergers and Acquisitions , 2017 .

[42]  Eugene F. Soltes,et al.  Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation , 2017, SSRN Electronic Journal.

[43]  Jacob D. Leshno,et al.  Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System , 2017, The Review of Economic Studies.

[44]  Neil Gandal,et al.  Price Manipulation in the Bitcoin Ecosystem , 2017 .

[45]  M. Verbeek,et al.  Trading is Hazardous to Your Wealth: Evidence from Mutual Funds Around the World , 2017 .

[46]  Christophe Bisière,et al.  The Blockchain Folk Theorem , 2018, The Review of Financial Studies.

[47]  J. Griffin,et al.  Manipulation in the VIX? , 2017 .

[48]  Tālis J. Putniņš,et al.  Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? , 2018, The Review of Financial Studies.

[49]  J. Gans,et al.  Initial Coin Offerings and the Value of Crypto Tokens , 2018 .

[50]  Aleh Tsyvinski,et al.  Risks and Returns of Cryptocurrency , 2018, The Review of Financial Studies.

[51]  Mark A. Chen,et al.  How Valuable Is FinTech Innovation? , 2018 .

[52]  N. Barberis,et al.  Extrapolation and Bubbles , 2016, Journal of Financial Economics.

[53]  J. Kamps,et al.  To the moon: defining and detecting cryptocurrency pump-and-dumps , 2018, Crime Science.

[54]  L. Cong,et al.  Blockchain Disruption and Smart Contracts , 2018, The Review of Financial Studies.

[55]  Sabrina T. Howell,et al.  Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales , 2018, The Review of Financial Studies.

[56]  Trading and Arbitrage in Cryptocurrency Markets , 2018 .

[57]  Tao Li,et al.  The Wisdom of Crowds in FinTech: Evidence from Initial Coin Offerings , 2019, The Review of Corporate Finance Studies.

[58]  Maureen O'Hara,et al.  From Mining to Markets: The Evolution of Bitcoin Transaction Fees , 2018, Journal of Financial Economics.

[59]  Pre-Trade Hedging: Evidence from the Issuance of Retail Structured Products , 2019 .

[60]  Jiasun Li,et al.  Direct Evidence of Bitcoin Wash Trading , 2019, SSRN Electronic Journal.

[61]  Benjamin Livshits,et al.  The Anatomy of a Cryptocurrency Pump-and-Dump Scheme , 2018, USENIX Security Symposium.

[62]  J. Griffin,et al.  Is Bitcoin Really Un-Tethered? , 2019 .

[63]  L. Cong,et al.  Decentralized Mining in Centralized Pools , 2019, The Review of Financial Studies.

[64]  R. Greenwood,et al.  Bubbles for Fama , 2017, Journal of Financial Economics.

[65]  Tingqiang Chen,et al.  Daily Price Limits and Destructive Market Behavior , 2017, Journal of Econometrics.

[66]  Fahad Saleh,et al.  Blockchain Without Waste: Proof-of-Stake , 2020, The Review of Financial Studies.

[67]  Chen Lin,et al.  An Inside Look into Cryptocurrency Exchanges , 2020 .

[68]  Neil D. Pearson,et al.  Pre-Trade Hedging: Evidence from the Issuance of Retail Structured Products , 2019, Journal of Financial Economics.

[69]  Campbell R. Harvey,et al.  DeFi and the Future of Finance , 2021 .

[70]  Wei Xiong,et al.  A Model of Cryptocurrencies , 2020, Management Science.

[71]  Franz J. Hinzen,et al.  Bitcoin's Limited Adoption Problem , 2020, SSRN Electronic Journal.

[72]  MARKET MANIPULATION , 2021, EU Market Abuse Regulation.