Since Bitcoin’s inception, cryptocurrencies have grown from digital novelties to trillion-dollar technologies that power a broad swath of our economy. But their irrational volatility has raised concerns over financial instability, criminal activity, and environmental harms, prompting many governments to begin crafting rules for the industry.
The cryptocurrency ecosystem is a complex web of blockchains, tokens, and exchanges, where the price of crypto assets rises and falls on speculation. Investors are flooded with information and react to new data in real time, causing rapid changes in asset prices (Kalev et al., 2016). Technology has accelerated this process, with newswire communications offering new information to traders worldwide in seconds.
This influx of data has led to the discovery of a number of anomalies in crypto market dynamics. First, the oldest cryptocurrency, Bitcoin, experiences an asymmetric news effect, with positive (negative) news increasing (decreasing) its prices. This result can be explained by herd behavior, where uninformed investors follow the crowd out of fear of missing out, and informed investors act as contrarians.
Second, the crypto market has been abused by fraudsters who impersonate established companies and create social media ads or news articles to trick uninformed investors into buying their fraudulent coins or tokens. These scams typically end up stealing the investor’s money, and regulators have warned investors to be careful when investing in such schemes. They also recommend avoiding any “white papers” on the back of which a coin or token is being sold, as they can be indicative of fraudulent behavior.
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