Cryptocurrency Pump-and-Dump Schemes

Abstract We document numerous occurrences of pump-and-dump schemes (P&Ds) targeting cryptocurrencies, which tend to trigger short-term episodes that feature dramatic increases in prices, volume, and volatility, followed by quick reversals. The evidence we document, including price run-ups before P&Ds start, suggests wealth transfers from outsiders to insiders. Our findings based on wallet-level data are consistent with the reasoning that gambling preferences, overconfidence, and naïve reinforcement learning help explain P&D participation. Finally, exploiting two natural experiments in which exchanges altered P&D policies, we find evidence consistent with the idea that P&Ds contribute to reduced cryptocurrency liquidity and lower prices.