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

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  • Anirudh Dhawan
  • Tālis J Putniņš

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.

Suggested Citation

  • Anirudh Dhawan & Tālis J Putniņš, 2023. "A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets," Review of Finance, European Finance Association, vol. 27(3), pages 935-975.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:3:p:935-975.
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    Cited by:

    1. Lars Hornuf & Paul P. Momtaz & Rachel J. Nam & Ye Yuan, 2023. "Cybercrime on the Ethereum Blockchain," CESifo Working Paper Series 10598, CESifo.
    2. Dean Fantazzini & Yufeng Xiao, 2023. "Detecting Pump-and-Dumps with Crypto-Assets: Dealing with Imbalanced Datasets and Insiders’ Anticipated Purchases," Econometrics, MDPI, vol. 11(3), pages 1-73, August.

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    More about this item

    Keywords

    Market manipulation; Pump-and-dump; Cryptocurrencies; Overconfidence; Gambling;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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