One of the most insidious dangers in cryptocurrency is the phenomenon called “rug pull.” Investors and enthusiasts must be prepared for both opportunities and risks in the crypto space. In this blog, we will talk about crypto rug pull, its history, types of rug pull, and how to avoid it, along with understanding its signs.
What Is A Rug Pull?
The term “rug pull” is taken from the saying “pulling the rug out from under someone,” which perfectly describes the essence of this phenomenon. A crypto rug pull is a malicious scheme in which creators or developers suddenly leave a cryptocurrency project after raising funds from the investors of the project.
In a basic rug pull scenario, the project’s creators promote the project and its token aggressively after promising big returns and revolutionary technological results. They use sophisticated marketing techniques, fake promises, fake partnerships, or even the names of big trusted figures to gain credibility in the crypto landscape. Once they have got the desired amount of assets with them they suddenly leave the project or disappear, taking all the funds with them, and leaving the investors with worthless tokens.
History/Examples Of Rug Pulls
The term “rug pull” might be a little new in the crypto market, but the concept of such exit scams has been around since the early days of the crypto landscape. As the market grew and decentralized markets emerged with more popularity, the frequency of rug pull scams increased a lot.
One of the latest examples of a huge crypto scam ( not entirely rug pull ) was OneCoin. This operated from 2014 to 2017 and defrauded investors of an estimated $4 billion. This made a path for more such scams and rug scams in the years that came after this.
The decentralized boom of 2020 and 2021 saw a surge in rug pull scams. Because people felt it was very easy to create and list a new token on decentralized platforms and set up a proper rug pull scheme. Some notable rug pulls during this time were the Thodex exchange disappearance, the AnubisDAO scam, and the infamous squid game token.
What Are The Types Of Crypto Rugs?
Rug pulls can be categorized into two main types: hard rug pulls and soft rug pulls. Hard rug pulls are sudden and completed, while soft rug pulls occur gradually over time. Here are the types of crypto rugs:
- Fake projects: Scammers create white papers, elaborate websites, and the social media presence of a project and its tokens. After raising desired funds through token sales and initial offerings, they disappear with the money.
- Liquidity pulls: In this situation, scammers remove all the liquidity from a token’s trading pool on a decentralized exchange. This action makes it impossible for investors to sell their tokens, making them worthless.
- Team exit scams: In this scam, the whole team of creators and developers of a project suddenly vanishes, abandoning the whole project and leaving investors without any support or recourse.
- Pump and dump: These are not strictly rug pulls; these schemes involve artificial inflating of a token’s price through coordinated buying or false hype. The scammers then sell the holdings at the highest price, causing the price to crash and leaving investors with nothing but losses.
What Are The Signs Of A Potential Rug Pull?
Identifying a rug pull before it happens can save investors from huge losses. Here are some signs of potential rug pull you should not avoid:
- Unrealistic promises: Be wary of projects that promise guaranteed high returns and profits. See if they use aggressive marketing tactics to create FOMO among people.
- Unverified team members: If the project’s team members, like creators and developers, are unknown or new, then this is a major warning sign you should not avoid. Legitimate projects have team members with history and verifiable backgrounds.
- Centralized token distribution: If a large number of tokens are kept by a smaller number of wallets, then it increases the risk of rug pull.
- Fewer code audits: Reputable projects undergo third-party security audits. If there is an absence of such audits or the members refuse to share the audit reports, then this is very suspicious, and you should become more serious.
- Copied documents: Lack of technical documentation details can indicate a scam.
- A limited supply of liquidity: Projects that have less or a locked liquidity supply are risky, making it easier for developers to drain funds.
- Excessive marketing methods: While marketing is normal, excessive marketing or over-promoting of tokens and projects is a big suspicion.
How To Protect Yourself From Rug Pulls?
Follow these methods to protect yourself from rug pulls:
- Do your research thoroughly. Before starting a new project, research everything and look into the team’s background, documentation, roadmap, and more.
- Search for projects with fair and good token distribution and locked team tokens as well.
- Take up projects that have undergone and published the results of their third-party security audits. Do not let it go easily.
- If you want to invest in a project, start small. Test the waters before going all in with investments.
- If you find active engagement on social media platforms like Telegram and Discord then this is a positive sign. But do not overlook excessive marketing.
- If you find the project to be too good to be true, then rethink everything again, do your research again, and don’t let your FOMO make decisions for you.
Overall
The cryptocurrency space offers opportunities, but it also comes with multiple scams and risks. Rug pulls are a serious threat, but you can protect yourself by staying informed and taking cautious actions. Remember, the crypto landscape is not safe but your best protection is staying vigilant and informed about what is wrong and what is right.
