With the rise of cryptocurrency globally, many people have benefited from it. But, apart from that, some big scams have also taken place. One of the most common scams in recent times is crypto rug pulls. They have stolen millions of dollars from investors, and yet, people still fall for them.
In this article, we will help you learn about rug pulls and tips to avoid them.
What Are Crypto Rug Pulls?
When a developer comes out with a new crypto project that requires substantial investment, they collect the funds from the investors, resulting in the high price of the cryptocurrency. If they sell it after gaining sufficient funds; it leaves investors at a loss and a vulnerable experience in crypto investments. This kind of scam is known as Crypto Rug Pulls.
Here are a few methods scammers use:
- Convincing investors successfully by representing themselves professionally.
- Creating a very appealing website, and some even make their social media platforms where they are active and post stuff related to how great their project will be.
- Making big claims like their token has so much potential that it can be the next bitcoin.
Types of Crypto Rug Pulls
There are many kinds of crypto rug pulls, for example:
The developer sells their shares – First, the developer steps into the market with his project. They create a vast hype regarding the token and claim it to be valuable, but it is hollow. When investors put their money in it, the token rises, and the developer sells out their shares and runs away.
Disability to sell tokens – Some other types of crypto rug pull scams are where investors can’t sell their shares. The developers enter some codes that steal investors’ right to sell. But the developer is still able to sell all the claims. Hence, when the cryptocurrency price rises, he takes out all the funds and runs away.
Stealing liquidity – Stealing liquidity is the most expected rug pull. A developer lists an altcoin on a decentralized exchange (DEX) and pairs it with a top-performing cryptocurrency like Ethereum (ETH). He also builds a liquidity pool and creates hype about the project.
The investors will now swap their ETH with the new tokens at the liquidity pool. The developer draws all the ETH from the liquidity pool once the token becomes pricey. Now the investors in the pool have no way to trade with their valueless tokens.
Examples of Crypto Rug Pulls
In the recent time, many crypto rug pulls have occurred, including:
The squid game token
It lifted the price of tokens by more than 230,000% within two weeks, and the sellers didn’t have the right to sell. It crashed immensely within 5 minutes, and investors lost around 3.4 million US dollars.
Another rug-pull scam was the OneCoin. It is considered the biggest scam in the crypto world. It stole around 25 billion US dollars from investors. The leader of OneCoin was arrested back in 2017. But other founders are still out of reach.
How to Identify Scam Projects?
Here are some signs that you need to watch out for spotting crypto rug pulls.
- If the cryptocurrency developer is anonymous, the chances are high that there’s something wrong.
- The project has huge claims, like becoming the next bitcoin or revolutionizing the crypto world.
- The project appearing suddenly can be another sign that it’s a scam. The legit crypto projects have plans and strategies that take time to prepare thoroughly, and they can’t appear overnight.
- Their websites are made with meager effort, and they have no social media accounts. In some cases, they may have an account but with a very low following and lack genuine audience engagement. These are the crucial signs indicating the untrustworthiness of the crypto project.
- If the liquidity is unlocked, the high chances are that it’s a scam because unlocked liquidity makes it too easy for developers to withdraw the fund and run away.
Cryptocurrency trading can be fruitful if we invest mindfully. Many people nowadays put money in any cryptocurrency and encounter loss. This probably happens because of the lack of knowledge. It can lead to huge risks, such as investing in scams like crypto rug pulls.
Remember that cryptocurrencies have no central authority, resulting in less cryptocurrency security. This gives a big room for scammers to fool people. So, before investing, make sure to do your top-quality research.
1. Are rug pulls illegal in crypto?
Rug pulls are always unethical but not necessarily illegal. Hard rug pulls are always illegal, but soft rug pulls are unethical but not illegal. For instance, if a crypto project promises to donate the coins to a charity but instead keeps them to itself, this is unethical but not illegal.
2. How do rug pulls happen?
Rug pulls refers to a situation where the creator of a cryptocurrency pulls the rug from underneath an individual’s feet. Liquidity stealing, dumping, and limiting sell orders are some of the major types of rug pulls.
3. How do I know if my crypto rug is pulled?
When things look too good to be true, it is a sign to dig deeper and research rigorously before investing. Signs like only listed on DEXs with few people owning the majority of the crypto, and low liquidity could be an indication of a rug pull.