The crypto space is rife with opportunities, but it’s also riddled with risks, one of the most prevalent being rug pulls. To start, we would first have to define what a crypto rug pull is.
A rug pull is a fraudulent scheme in the crypto space where project developers intentionally abandon a project after attracting investor funds. They essentially “pull the rug out from under” unsuspecting investors, leaving them with worthless tokens and disappearing with their money.
How a crypto rug pull works
- Hype and promotion: Rug pullers often create significant hype around their project, promising high returns and innovative features. They use social media, influencers, and paid promotions to attract investors.
- Token creation: They create a new cryptocurrency token and list it on decentralised exchanges, where there are fewer barriers to entry and less scrutiny.
- Liquidity manipulation: To create the illusion of market demand, they may artificially inflate the token price through coordinated buying and selling activity.
- Exit scam: Once they accumulate enough investor funds, they abruptly abandon the project, disable trading, and disappear with the stolen money.
Types of rug pulls
- Hard rug pull: This involves pre-planning and manipulating the code to ensure the developers can steal funds without any possibility of recovery.
- Soft rug pull: This involves abandoning the project without code manipulation, relying solely on hype and misleading information to attract investors.
Examples of rug pulls
- Squid Game (SQUID): In late 2021, this project inspired by the popular Netflix series rapidly gained popularity. However, its developers abandoned it shortly after its launch, taking millions of dollars from investors.
- Titan (TITAN): This decentralised finance (DeFi) protocol promised high returns but collapsed abruptly in June 2021, leading to $2 billion in losses for investors.
- $CAMO: In 2022, this project’s developers locked liquidity for only a week before unlocking it and draining the funds, leaving investors with worthless tokens.
To protect your hard-earned money, here are 10 tips to help you avoid falling victim to these scams:
10 Tips to help you avoid falling victim to a crypto rug pull
1. Do your own research (DYOR)
Never blindly invest in any crypto project. Take the time to understand its technology, team, whitepaper, roadmap, and community sentiment. Research the founders’ backgrounds and look for red flags like a lack of experience, anonymity, or unrealistic promises.
- Research the project’s technology: Understand what problem it solves and how it works. Read the whitepaper and other technical documentation to assess its feasibility and potential.
- Research the team: Investigate the team’s background and experience. Are they qualified and reputable? Have they been involved in successful projects previously?
- Research the whitepaper: The whitepaper should clearly outline the project’s goals, roadmap, and tokenomics. Look for any inconsistencies or red flags, such as unrealistic promises or vague descriptions.
- Research the roadmap: Does the roadmap provide realistic milestones and timelines? Is the team transparent about their progress?
- Research the community sentiment: Join the project’s online communities and forums. Analyse the overall sentiment and identify any concerns or red flags raised by other members.
Available Card Tiers: Obsidian, Frosted Rose Gold, Icy White, Royal Indigo, Jade Green, Ruby Steel and Midnight Blue.
5% Cash back
2. Use trusted exchanges
Stick to reputable exchanges with a proven track record of security and user protection. Avoid decentralised exchanges (DEXs) unless you’re confident in your ability to assess their legitimacy.
- Choose exchanges with a long track record of security and user protection. Look for exchanges that are regulated and have undergone independent audits.
- Avoid newly launched or obscure exchanges, as they may be more susceptible to security breaches or scams.
- Be wary of exchanges that offer exceptionally high trading volumes or liquidity, as this could be a sign of manipulation.
3. Look for liquidity lock
Rug pullers typically lock liquidity for a short period or not at all. Look for projects with locked liquidity for a substantial period, preferably a year or more. This indicates the team’s commitment and reduces the risk of them abandoning the project with investors’ funds.
- When developers lock a portion of the project’s liquidity for a specified period, it demonstrates their commitment and reduces the risk of them absconding with investor funds.
- Investigate the locking mechanism and ensure it is secure and verifiable. Be wary of projects that lock liquidity for a short period or use centralised solutions that can be manipulated.
4. Analyse tokenomics
Scrutinise the project’s tokenomics, including the token allocation, distribution, and burn schedule. Be wary of projects with a high concentration of tokens held by the team or advisers, as this increases the risk of manipulation.
- Understand how the tokens are distributed and allocated. Be wary of projects with a large percentage of tokens held by the team or advisors, as this can lead to price manipulation and dumping.
- Look for projects with a clear burn schedule for tokens, as this can help reduce inflation and increase the value of remaining tokens.
- Analyse the token’s utility within the project’s ecosystem. Does it have a clear purpose and value proposition?
Get up to 5% back on spending paid in crypto. No monthly, annual, or ATM withdrawal fees.
5. Beware of hype
Be cautious of heavily hyped projects promising exorbitant returns. Genuine projects rarely rely on excessive promotion. Favour projects with a focus on organic growth and building a strong community.
- Be cautious of projects heavily promoted by celebrities or influencers. Often, these projects are pump-and-dump schemes designed to attract unsuspecting investors.
- Do not blindly follow recommendations on social media or online forums. Always conduct your own research before investing.
- Focus on projects with a strong focus on building a solid product and community, rather than those relying solely on hype.
6. Stay away from pump-and-dump schemes
These schemes artificially inflate the price of a token through coordinated buying and selling, ultimately dumping the price and leaving investors holding the bag. Avoid projects with sudden price spikes followed by steep declines.
- These schemes often involve coordinated buying and selling activity to artificially inflate the price of a token. Once the price reaches a peak, the organisers dump their tokens, causing the price to plummet and leaving investors with significant losses.
- Be wary of projects with sudden and unexplained price spikes followed by sharp declines.
- Avoid projects with a small number of large holders, as this can indicate potential manipulation.
Trade and invest in a diversified portfolio, starting at $10, or practice risk-free with a virtual portfolio.
Get investment ideas from 30M users and invest in 3,000+ assets on a trusted and friendly platform.
7. Use rug pull detection tools
Several tools scan for rug pull indicators, including liquidity unlocks, large token transfers, and suspicious wallet activity. Consider utilising these tools for additional protection.
- Several tools analyse blockchain data and identify potential rug pull indicators, such as liquidity unlocking events, large token transfers, and suspicious wallet activity.
- Consider utilising these tools as an additional layer of protection, but remember that they are not foolproof and should not be your sole basis for investment decisions.
- Popular rug pull detection tools include RugDoc, SCAMEX, and TokenSniffer.
8. Invest in stages
Don’t invest your entire allocation at once. Invest in stages to monitor the project’s progress and mitigate potential losses.
- Instead of investing your entire allocation at once, consider investing in stages over time. This allows you to monitor the project’s progress and mitigate potential losses.
- Start with a small investment and increase your stake if the project demonstrates positive development and meets your expectations.
9. Diversify your portfolio
Don’t put all your eggs in one basket. Spread your investments across different projects and asset classes to reduce the impact of potential rug pulls.
- Spread your investments across different projects and asset classes to mitigate risk. This way, you are not overly exposed to any single project, including the risk of a rug pull.
- Consider investing in a variety of cryptocurrencies, DeFi protocols, NFTs, and other assets to achieve a balanced and diversified portfolio.
10. Stay informed
Keep yourself updated with the latest news and developments in the crypto space. Follow credible sources and communities to stay ahead of potential scams.
- Keep yourself updated with the latest news and developments in the crypto space. Follow credible sources and communities to learn about new projects, potential scams, and regulatory changes.
- Subscribe to newsletters, attend online conferences, and participate in discussions with other crypto enthusiasts to stay at the forefront of the market.
Utilise two-factor authentication (2FA) on all your crypto accounts and wallets to enhance security.
By following these tips and remaining vigilant, you can significantly reduce your risk of falling victim to a crypto rug pull and protect your hard-earned money. Remember, due diligence and a healthy dose of scepticism are your best weapons against scammers in the ever-evolving crypto landscape.
When you buy something through our retail links, we may earn commission and the retailer may receive certain auditable data for accounting purposes.
- The shocking truth behind declining product quality: Is nothing made to last anymore?
- How to choose a good online casino
- $15 billion Onecoin Ponzi scheme: The story of the ‘Cryptoqueen’, Ruja Ignatova
- Everything you need to know about PTSD compensation charts
- How to become a remote proofreader
You may also like: