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Scammers use social media platforms to impersonate celebrities or acquaintances and persuade victims to make fake investments. The rise of cryptocurrencies and the lack of regulations gave new tools to these criminals.
We’ll look at how the market is attempting to safeguard investors today. For example, crypto commentators frequently emphasize anti-dumping regulations to deter online fraudsters.
What Are Pump and Dump Operations?
Before dwelling on anti-dumping policies, we must understand what a “pump and dump” operation is.
A pump and dump scheme is a financial fraud initially involving only equities. To increase interest in a stock, criminals manufacture fake publicity about it. As soon as investors purchase shares, the stock’s price rises.
The scammers only need to sell their shares when the price hits a predetermined level. As a result, the stock price plummets, leaving new investors suffering a money loss.
How Do Pumps and Dumps Work in Crypto?
Due to their lack of regulation, cryptocurrencies have proved to be a powerful tool for this scam. The main idea is the same as the one we mentioned earlier: criminals artificially pump up the price of a crypto asset.
Crypto investors frequently discuss FOMO (or “Fear Of Missing Out”). As the price of a coin explodes, some inexperienced traders feel it’s a good idea to enter the market. This mechanism is, ultimately, the real fuel of the scamming operation.
After the pumping phase, investors quickly find themselves holding coins at a very high price. Even worse, the sudden collapse in the price of a token (or “dump” phase) will push investors to sell coins.
In a matter of a few minutes, traders may end up losing an appropriate amount of money. Unfortunately, these scams have a high chance of success in the crypto market, at least for a couple of reasons:
- Fake news creation in the crypto world: one may argue that it is easier to spread a fake rumor on a new token than on the stocks of a large company
- Creating malicious smart contracts: skilled criminals may create specific smart contracts to scam users, following the “honeypot” scheme. These contracts allow the purchase of tokens while blocking the sale.
How Can the Market Protect Investors?
An anti-dumping policy is a collection of measures designed to protect investors from pump-and-dump scams. For example, consider the SQUID token, which used to be worth only $0.01. Investors observed a huge pumping phase but could not sell SQUID.
When the price of SQUID rose in a market with only buyers, the fraudsters made off with the entire investment. Within minutes, the token’s value plunged from $90 to $0.00079.
Some new crypto projects launch their tokens by including an anti-dumping rule in the smart contracts. However, there are several ways to limit these operations, such as forbidding large sales.
The idea of preventing whales from playing around with the coin price is a self-regulation operation in the crypto world. While we wait for specific legal interventions from policymakers, the market is working to fight these scams.
Another way to fight to dump is to reduce the available tokens over time. Teams utilize a buyback program for various purposes, including what we have just mentioned.
The goal is to increase token prices drastically, promote speculation, and generate excitement. A team that sustains the price floor of a token may attract long-term investors.
Is There Anything Investors Can Do to Avoid These Scams?
While anti-dumping policies remain a fundamental tool to avoid dumping, investors must always be vigilant. Looking back at previous scams, the signals that teams have a secondary goal are all out there.
Once again, think about SQUID. The token founders were anonymous, and searching the few names that the market knew gave no results on Google. Suspiciously, the project’s documents, website, and social channels contained many spelling errors.
While these hints may not be sufficient to label a crypto project as a “scam,” investors should be cautious. Moreover, there are a few measures that any trader can put in place to avoid these traps:
- Audits: many independent auditors are out there to review the security of projects’ smart contracts. If a new initiative has no independent audits, we may want to be careful before investing.
- Lack of long-term plans: a lack of commitment to the long-term is another red flag in the crypto world. Sometimes, tokens’ founders lock away their funds for a specific period. This step represents a good guarantee for investors that the project won’t lead to a rug pull.
DeFi is one of the most exciting aspects of the crypto ecosystem, offering excellent prospects to businesses and users.
However, DeFi’s decentralization needs to find a way to avoid fraud and theft vulnerability. While the IMF called for a global crypto policy to protect investors, the market is still in a self-regulation phase.