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

This article investigates the widespread phenomenon of cryptocurrency pump-and-dump manipulation schemes, where manipulators openly announce their intent to inflate the price of specific coins before rapidly selling them. Unlike traditional stock market manipulation, these schemes do not rely on misinformation or information asymmetry but function as a negative-sum game where most participants, except manipulators, incur losses. The study develops a theoretical framework showing that behavioral factors—overconfidence and gambling preferences—explain why individuals participate despite negative expected returns, supported by empirical analysis of 355 pump cases on Binance and Yobit exchanges. Pumps cause extreme but short-lived price distortions (averaging 65% increases within minutes), generate abnormal trading volumes, and primarily target relatively illiquid coins, with prices reverting to pre-pump levels shortly after. The article also discusses the welfare implications, highlighting wealth transfers from less sophisticated to more sophisticated participants, potential harm to market integrity, and the challenges of regulating these manipulations without stifling innovation in the cryptocurrency ecosystem.