What is anti-dumping policy in crypto?

An anti-dumping policy is designed to safeguard crypto investors from pump-and-dump schemes.

The term “anti-dumping policy” refers to actions taken by project developers, communities or exchanges to prevent financial fraud where scammers sell their crypto when the price reaches a certain level to make enormous profits before exiting the market. After that, the price sharply drops, leaving other investors suffering heavy monetary losses. Anti-dumping policy is designed to beat this scam.

In the crypto context, anti-dumping differs from the traditional anti-dumping measures taken by governments to protect domestic industries from the impact of foreign imports. The government would impose protective tariffs on imported goods and services to level the playing field for domestic producers and save the home economy.

What is a pump-and-dump scheme in crypto?

A pump-and-dump scheme involves an organized entity or a group of individuals that artificially inflate a crypto token’s price and then sell off their holdings for a profit, leaving investors with losses.

Fraudsters pump the price artificially by disseminating misleading information about the token and orchestrating a demand for the token through coordinated buying. 

In the hope of making a profit, unsuspecting investors pre-accumulate the asset at lower prices. The scammers then dump or sell off their holdings at inflated prices, triggering a dramatic collapse. While the perpetrators make a hefty profit, the other investors — who were led to believe in the asset’s potential due to the artificial hype — lose all their investments.

The orchestrators of pump-and-dump schemes take advantage of the largely unregulated cryptocurrency industry. They drive up the market sentiment around a scam token before cashing in on it, leaving other investors to lose their money and, often, their faith in the crypto ecosystem.

How does anti-dumping policy work?

Anti-dumping measures in crypto help protect investors by placing limits or fines on extensive token dumping or setting up a vesting period.

Anti-dumping regulations restrict buying or selling large quantities of tokens in one transaction, limit orders for the entire supply, apply value limitations or set up daily limits or price caps. Dumping is usually done by fraudulent investors who buy a large number of tokens to push up the prices substantially and sell these off for a hefty profit.

Here’s how anti-dumping policies work:

Buying and selling limitations

In the ever-changing cryptocurrency space, projects frequently put strategic controls in place to preserve token stability and deter market dumping. For instance, they incorporate buying and selling restrictions into the smart contract. These techniques are essential for long-term sustainability and investor trust since they lessen the risks brought on by price fluctuation. 

Ethereum’s EIP-1559 update changed the fee market mechanism, burning a portion of transaction fees, which can reduce the overall supply over time, potentially increasing the value and reducing the incentive to dump. 

By incentivizing node operators for their network participation, Chainlink lowers the likelihood of dumping by encouraging node operators to hang onto their Chainlink (LINK) tokens to continue collecting prospective rewards. According to a predetermined inflation schedule, a percentage of Solana’s inflation is designated for staking rewards. As a result, holders are encouraged to stake their tokens, which lowers the market’s liquid supply and deters dumping.

Token vesting

Token vesting entails locking freshly created or acquired tokens and releasing them after a predetermined time. Tokens granted to the founders and initial investors of a project typically vest over time. 

This technique prevents the flooding of tokens into the market and prevents any attempts from the founders to make money quickly and then abandon the projects. Investors should take into account the vesting schedule of a project.

How can investors avoid pump-and-dump schemes?

Investors should conduct due diligence to select projects that create value and are transparent. They should avoid projects that promise quick riches.

To escape harm is usually the best way to deal with it. In cryptocurrency, investors need to be cautious, conduct adequate research before investing, and avoid projects that don’t look trustworthy.

Keep a vigilant oversight

Before investing in any project, investors should be mindful of the risk of dumping and proceed with caution. The investors should investigate the founders of the projects and their track record, reviewing the relevant documents to determine if there are warning signs.

Squid token is a good example of a pump-and-dump scheme where signs of fraud were evident. The token fell from $90 to $0.00079 in just minutes. Investigations showed that the creators of the token were nonexistent and anonymous. The website and documents related to the project, such as the white paper and supplementary materials, had many misspellings. 

The warning signs indicated fraud, and if investors had been cautious, they could have avoided the scam. Some social media groups indicate a pump in the offing. Being active in these groups and understanding the warning signs may help prevent such fraud.

Ensure the project is audited

Comprehensive smart contract auditing helps prevent vulnerabilities in the code. Sufficient auditing underlines that a project is committed to security and safety protocols. Project owners with fraudulent intentions may deliberately leave vulnerabilities they can exploit later. 

Anti-dumping measures are incorporated via smart contracts and are audited by a reputable auditor. There are chances that fraudsters haven’t yet implemented what they have been claiming. If a project is open-source, one can go through the relevant code to determine how it is working under the hood. If the investor lacks the technical know-how, they could take an auditor’s help. 

Refrain from diving into FOMO

In the cryptocurrency arena, FOMO, or the “fear of missing out,” is a real worry. When the value of digital assets rises, many investors feel pressured to take advantage of the trend. This behavior sets off large price increases followed by subsequent sharp drops. For instance, The price of Bitcoin recently surpassed $70,000, driven by factors like the anticipated Bitcoin halving and spot Bitcoin exchange-traded fund approvals. Several investors may be gripped by FOMO, buy BTC at its peak, and end up taking a loss if the price drops later.

Investors should avoid making significant investments in little-known cryptocurrencies. In any case, investment shouldn’t be more than they can afford to lose.

Consider the Lindy effect

The Lindy effect is the concept that the older a non-perishable thing gets, such as a technology, the chances of its longevity increase. A technology or project that has existed for some time will have a higher chance of enduring and maintaining its relevance.

Investors might leverage the Lindy effect to evaluate the longevity and potential profitability of cryptocurrency and blockchain projects. If a blockchain project has already proven its durability over time, it’s more likely to stay operating and yield profits in the future.