Cryptocurrency Pump-and-Dump Schemes

Pump-and-dump schemes (P&Ds) are pervasive in the cryptocurrency market. We study these events using trade-by-trade data and a sample of P&Ds with precisely identified starting times. We find that P&Ds lead to short-term cryptocurrency bubbles featuring dramatic increases in prices, volume, and volatility. Prices peak within minutes and a quick reversal follows. The evidence we document, including a significant price run-up before the start of a P&D, implies that significant wealth transfers between potential insiders and outsiders occur. 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 that might explain why outsiders are willing to participate and describe how our findings shed light on theories of manipulation.