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

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.