Wednesday, October 31, 2018

An Academic Study: Dumb Money is Getting Scammed By Cryptocurrency Pump & Dump Schemes

Tao Li, University of Florida - Department of Finance, Insurance and Real Estate, Donghwa Shin
Princeton University - Department of Economics, Bendheim Center for Finance and Baolian Wang
University of Florida - Department of Finance, Insurance and Real Estate are out with a paper, Cryptocurrency Pump-and-Dump Schemes.

Here's the abstract:

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 from potential insiders to 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.
I have been warning that there is a lot of pump and dump in Bitcoin for years (See recently: Understanding the Bitcoin Pump and Dump...). That said, it doesn't mean I haven't traded in an out of Bitcoin (documented in real time in the EPJ Daily Alert) for substantial profits but this is a very dangerous game, for pros only, most will lose all.

(via Tyler Cowen)

No comments:

Post a Comment