Pump-and-dump schemes are avoided by cryptocurrency investors thanks to anti-dumping policies.
The phrase “anti-dumping policy” describes steps taken by exchanges, communities, or project creators to stop financial fraud, in which con artists sell their cryptocurrency at a high price in order to benefit handsomely before pulling out of the market. Following that, the price plummets dramatically, causing other investors to sustain significant financial losses. The purpose of anti-dumping policy is to foil this fraud.
Anti-dumping in the crypto space is not the same as the conventional anti-dumping actions that governments take to shield home sectors from the effects of imports. To level the playing field for domestic manufacturers and preserve the domestic economy, the government would apply protective tariffs on imported goods and services.
What in Cryptocurrency is a Pump-and-Dump Scheme?
In a pump-and-dump operation, a group of people or an organized company inflates the price of a cryptocurrency token artificially and then sells their holdings for a profit, leaving investors with losses.
By spreading false information about the token and arranging for coordinated purchases, scammers manipulate the price artificially.
Unaware investors pre-accumulate the asset at cheaper prices with the hopes of profiting. Then, the con artists sell out or dump their shares at inflated prices, causing a sharp decline. The other investors lose everything they invested because they were misled by the false hype into thinking the asset had promise, while the culprits benefit handsomely.
Pump-and-dump scheme operators profit from the highly uncontrolled bitcoin market. Before profiting from a fraudulent token, they inflate its market sentiment and cause other investors to lose money and, frequently, their confidence in the cryptocurrency industry.
How do Anti-Dumping Laws Operate?
By imposing restrictions or punishments on substantial token dumping or establishing a vesting period, anti-dumping measures in the cryptocurrency space serve to safeguard investors.
Anti-dumping laws forbid buying or selling big amounts of tokens in a single transaction, restrict orders for the whole supply, impose value restrictions, and establish daily or price ceilings. Fraudulent investors who purchase a huge quantity of tokens in order to sharply increase their price and then sell them for a fat profit are typically the ones that engage in dumps.
The following is how anti-dumping laws operate:
Limitations on purchasing and selling
To maintain token stability and prevent market dumping, projects often use strategic controls in the constantly evolving cryptocurrency industry. For example, they include constraints on purchasing and selling in the smart contract. These strategies are critical for long-term viability and investor confidence since they reduce the risks associated with price volatility.
By burning a percentage of transaction fees, Ethereum’s EIP-1559 update altered the fee market mechanism. Over time, this might lower the overall supply, raising the value and decreasing the motivation to dump.
Chainlink reduces the possibility of dumping by rewarding node operators for their network activity and encouraging them to hold onto their Chainlink (LINK) tokens in order to continue earning potential rewards. A portion of Solana’s inflation is set aside for staking rewards in accordance with a predefined inflation schedule. Because of this, holders are motivated to stake their tokens, which reduces the amount of liquid supply on the market and discourages dumping.
Vesting of tokens
Token vesting is the process of locking newly created or acquired tokens and subsequently releasing them at a prearranged interval. Usually, tokens awarded to a project’s founders and early backers vest gradually.
This method stops an overabundance of tokens from entering the market and stops entrepreneurs from trying to fast profit from their ventures before giving them up. Investors ought to consider a project’s vesting timetable.
How Can Investors Steer Clear of Scams that Pump and Dump?
Due diligence should be done by investors to choose transparent and value-generating initiatives. Projects that promise rapid wealth should be avoided by them.
The best course of action is typically to get away from the danger. When investing in cryptocurrencies, investors should exercise caution, do their homework, and stay away from dubious-looking ventures.
Maintain Close Supervision
Investors should exercise caution and consider the risk of dumping before making any investments. Investors ought to look into the project founders’ backgrounds and track records, going over pertinent documentation to see if any red flags exist.
An excellent illustration of a pump-and-dump strategy where fraud was clearly visible is Squid Token. In a matter of minutes, the token dropped from $90 to $0.00079. Research revealed that the token’s inventors were nameless and nonexistent. Numerous misspellings may be found on the project’s website and in related papers including the white paper and supplemental materials.
Investors could have prevented the swindle if they had been vigilant, as the warning indicators pointed to fraud. Certain social media groups suggest that a pump is about to happen. Participating actively in these communities and being aware of the red flags could help stop this kind of scam.
Ensure an Audit of the Project
Thorough auditing of smart contracts aids in preventing code vulnerabilities. An adequate auditing process confirms a project’s adherence to security and safety procedures. Owners of fraudulent projects may purposefully leave gaps in their security that they can subsequently take advantage of.
Smart contracts are used to implement anti-dumping procedures, which are then audited by a reliable auditor. It’s possible that con artists haven’t carried out what they’ve been saying yet. If a project is open-source, it is possible to examine the pertinent code and learn how it functions internally. Should the investor lack technical expertise, they may seek assistance from an auditor.
Avoid Giving in to FOMO.
In the world of cryptocurrencies, FOMO, or “fear of missing out,” is a serious concern. A surge in the value of digital assets puts pressure on many investors to cash in on the trend. This conduct triggers significant price spikes that are followed by abrupt decreases. For example, the recent surge in the price of Bitcoin beyond $70,000 was caused by the expected halving of the cryptocurrency and the acceptance of spot exchange-traded funds. Several investors might succumb to FOMO, purchase Bitcoin at its highest point, and then lose money if the price declines later.
It is not advisable for investors to make large bets on obscure cryptocurrencies. Anyhow, people shouldn’t invest more than they can bear to lose.
Think About the Lindy Effect.
The Lindy effect states that an item’s likelihood of lasting longer increases with age, such as with technology. A project or technology that has been around for a while is more likely to endure and remain relevant.
The Lindy effect can be used by investors to assess the viability and possible profitability of blockchain and cryptocurrency initiatives. A blockchain project is more likely to continue running and making money in the future if it has already demonstrated its resilience over time.
