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

Anirudh Dhawan and Tālis J Putniņš

Review of Finance, 2023, vol. 27, issue 3, 935-975

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.

Keywords: Market manipulation; Pump-and-dump; Cryptocurrencies; Overconfidence; Gambling (search for similar items in EconPapers)
JEL-codes: G14 G41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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