Rug Pull Explained and How to Stay Safe
According to Coinmarketcap, there are more than 1.8 million cryptocurrency projects. The reality is that most of these projects would fail. Another reality is that a lot of the projects are scams.
If you have been in the cryptocurrency space for years, rug pull is a term you are familiar with. However, if you are still new to the industry, it is a term you need to be aware of. In this rug pull explained article, we look at the rug pull definitions, signs, and how to stay safe from rug pulls.
What is a Rug Pull?
A rug pull can best be described as when cryptocurrency or NFT developers shut down their projects or run away with investors’ money after hyping their projects to attract investors. This is the rug pull definition, and the term was coined from the idiom “to pull the rug out” from under someone.
Definition and Explanation
To understand rug pull meaning crypto scams, you have to understand how cryptocurrency projects work. Marketing is crucial to the success of any crypto or NFT project. The developers and community need to market their projects to attract more investors.
However, with rug pull, the developers focus on marketing their projects to attract more investors and then run away with investors’ funds afterwards. The developers pump their token prices before disappearing with the funds, leaving investors with valueless assets.
Rull pulls are a type of exit scam and are usually common within the decentralized finance (DeFi) ecosystem.
How Rug Pulls Occur in Cryptocurrency
With rug pull explained, you should know how they occur. There are basically two types of rug pulls; hard rug pulls, and soft rug pulls. With hard rug pulls, fraudulent developers code hidden backdoors into their tokens, allowing them to withdraw all their coins from the liquidity pool quickly.
In this scenario, investors are unaware of the backdoor, and the developers can empty the pools, leaving investors with worthless tokens. The developers wait to achieve their target before running away with the funds.
In the second scenario (soft rug pull), the developers dump their crypto assets quickly, resulting in a massive decline in the price of the tokens. After hyping a project to get investors in, the developers sell their assets quickly, earning massive profits in the process while leaving investors with worthless assets.
Recognizing the Signs of a Rug Pull
The cryptocurrency market has over 20,000 projects, making it hard for investors to distinguish between genuine and fraudulent ones. However, there are signs that can indicate that a crypto project is fraudulent, and the developers might execute a rug pull, meaning cryptocurrency scam.
With rug pull explained so far to this point, here are signs to recognize a rug pull;
- Hidden backdoors in a project’s codes.
- Liquidity pool drain.
- Sudden price crash
- Developer anonymity.
Sudden Price Drops and Liquidity Drain
While cryptocurrencies are volatile, they are not too volatile to lose over 50% of their value within a few minutes or hours. If you notice a sudden drop in token price, it may be due to the developers dumping their assets quickly (rug pull).
This type of rug pull is called the soft rug pull. The developers hype up a project to draw investors and encourage trading activities. They leverage marketing tools like social media and other incentives to promote their projects.
After inflating a coin or NFT’s value, the developers instantly sell off their token supply, tanking its value. Investors would now be left with mostly worthless assets.
Pump and dump schemes can span hours or years, depending on the ultimate goal of the developers
Crypto projects on decentralized exchanges (DEXes) require a pool of tokens for trades and other activities. The tokens are secured with smart contracts, but fraudulent developers build backdoors into the contracts, allowing them to steal the pool of tokens from their investors. If all the tokens in the liquidity pool have been withdrawn quickly, the project is most likely rug-pulled. Ensure you only use the best DeFi apps to purchase tokens to avoid rug pull.
Developer Anonymity and Lack of Transparency
Another sign of recognizing a crypto rug pull is that the developers are anonymous. While this may not always hold true, most projects with anonymous developers turn out to be scam projects. For your safety, it is best to only interact with projects with known and active developers.
Investors need to consider the credibility of the people behind a cryptocurrency project. You need to ask tough questions, such as the popularity of the developers within the crypto community and their track record.
Real-Life Examples of Rug Pulls
According to a report by the blockchain risk monitoring firm Solidus Labs, a total of 117,629 token scams were carried out in 2022. This implies that an average of 350 cryptocurrency projects were launched last year with the aim of defrauding investors. Let us look at some popular rug pulls that happened in the crypto space.
Historical Cases of Notable Rug Pulls
Here are some of the most popular rug pulls that have affected numerous cryptocurrency investors in recent years.
Squid game rug pull
Squid Game was one of the most popular rug pulls in the history of the crypto market, as the project had the same name as a popular Netflix show. The developers assured investors that the project was created to recreate the series with a play-to-earn game.
However, investors needed a specific number of SQUID tokens before participating in the P2E game. Squid Game gained a massive following on social media within a few days of launch, and its price soared, generating a lot of media attention.
The developers rugged SQUID, the native token of the project, and drove its price down from US$3,000 to virtually US$0 in a little over 5 minutes. Numerous investors lost their life savings. Due to the anti-dumping feature, many of them could not sell their tokens in the open market when they wanted to. The developers ditched the project, deleted their official website and left their social media handles inactive.
This was a classic liquidity pooling rug pull that resulted in investors losing roughly $60 million. AnubisDAO’s had an anonymous developer, had no whitepaper and website. The developer proposed a decentralized currency backed by a basket of assets.
After receiving massive funds from investors, the developer drained the project’s liquidity pool 20 hours into the sale.
Blockverse is another popular crypto rug pull. Blockverse NFT is a play-to-earn NFT game based on the Minecraft universe. The NFTs were available to investors on OpenSea, one of the largest NFT marketplaces in the world. Investors could purchase Blockverse characters and a token called $Diamond.
However, the developers rug pulled the project, removed all the money put in Blockverse and disappeared and also deleted the project’s Discord and Twitter accounts. The project’s official website was also deleted. By using the best NFT apps, you will avoid getting rug pulled.
Lessons Learned from Past Incidents
Over the years, cryptocurrency investors have lost millions of dollars to rug pulls and scam projects. However, those losses didn’t come without their lessons. Here are some of the lessons learned over the years.
As an investor, it wouldn’t hurt to be skeptical when looking at a crypto project. Not every crypto or NFT project will be the next big thing. History shows that most of the projects in the space might not live up to their initial hype.
Fear of mission out (FOMO) is perhaps the biggest reason many investors fall victim to rug pulls. Take your time to carry out extensive research about a project. Do not invest purely because of the hype.
Be patient and learn everything you need about a project before investing in it. Keep in mind that in crypto, once you transfer the funds, you can’t cancel or back out.
DYOR (do your research) has never been more important than in the cryptocurrency space. A lot of noise and marketing hype follows a crypto or NFT project when it initially launched. It is your job as an investor to tune out the noise and focus on finding out everything you can about the project you wish to invest in.
Some of the information you need to search for includes developers’ backgrounds, the project’s focus and their token’s utility, tokenomics, and other data.
If the project has a whitepaper, ensure that you read it to obtain as much information as possible.
Your capital is at risk
Anatomy of a Rug Pull
Cryptocurrency rug pull goes through certain stages before it is completed. Fraudulent developers deploy some key elements and steps to gain investors’ trust before defrauding them of their hard-earned money.
Here is the natural cycle of a cryptocurrency rug pull;
The first step is to launch the cryptocurrency project. The process involves presenting an appealing concept, promising investors high returns, marketing innovative features, and presenting tokenomics that attract investors. By gaining access to the best crypto presales, you will reduce your chances of getting rug pulled.
Hype and promotion
The second step is where the marketing is done. The developers employ marketing tactics to create hype around their projects. Some of the marketing methods leveraged include employing influencers, social media campaigns, community engagement and partnerships to gain investors’ trust.
Token Sale and Liquidity Pool Formation
The developers launch a token sale or IDO where investors can purchase the project’s tokens. To attract investors, they offer incentives like early bird discounts or exclusive rewards. They also form liquidity pools for the project’s tokens.
Manipulating Token Prices
After the tokens are distributed, the developers try to manipulate the token’s price. They can use your funds or trading bots to help drive the price up. The surge in token price could be crucial in convincing more people to invest in the project due to FOMO.
Building Trust and Community
Building trust is crucial to their operations. The developers create a community (on Discord, Twitter, Telegram or Reddi), answer questions, and provide updates regarding the project. The goal is to create an illusion that the team is dedicated to the project’s growth.
Token Locking and Staking
Some developers might introduce token locking of staking features to deceive investors. They encourage investors to lock their tokens for a period of time in return for more rewards and incentives.
Draining Liquidity from Pools
When the fraudulent developers believe they have reached their desired target, they initiate rug pull. Depending on their initial plans, they can carry out a soft or hard rug pull.
Once the rug pull is executed, the token’s price collapses rapidly, resulting in massive losses for investors as they are unable to sell their tokens. The developers dry up liquidity pools, leaving investors with worthless assets.
The Role of Developers and Promoters
Developers and promoters play a crucial role in a crypto rug pull. Developers are the brains behind the operations as they develop the plan, launch the project, hire others to carry out specific tasks, and help promote the project.
However, developers do not solely handle the promotion of their projects. In most cases, they pay influencers to promote their projects.
Developer Influence on Token Value
Developers have a huge effect on the token value of a project. The more popular a developer is, the more valued their project will be.
Vitalik Buterin, Ethereum’s co-founder, is perhaps the most popular crypto developer in the world at the moment (since Satoshis Nakamoto remains unidentified). Due to his position in the market, any project Buterin launches will likely become an instant hit as millions of investors in the world trust him and have confidence in his work.
Hence, a developer’s reputation plays a crucial role in a token’s value. This is why as an investor, you need to DYOR, find out more about a project’s developers and check their track record. This will help you determine if a project is worthwhile or if it would likely be rug pulled.
In addition to their reputation, developers can manipulate a token’s price. They can use investors’ funds or trading bots to inflate a token’s price.
Influencer Marketing and Pumping
While developers have an influence on a token’s price, influencer marketing remains one of the biggest ways projects attract investors.
OneCoin, one of the most popular crypto scams in history, leveraged the power of influencer marketing and price manipulation to steal roughly $4 billion from investors globally.
Igor Alberts, one of the top MLM experts in the world, marketed OneCoin after coming in contact with the project in 2015. The project also employed the services of other influencers, including Bishop Fred and Konstantin Ignatov.
Popular celebrities such as Kim Kardashian, Floyd Mayweather, and former NBA star Paul Pierce have all previously promoted cryptocurrency projects. Influencer marketing is exceptionally successful in cryptocurrency and usually results in a token’s price pumping.
Ponzi Schemes and Exit Scams
So far, in this article, we have focused on the rug pull meaning and explained it in depth. However, that is not the only thing you need to watch out for. The crypto space is also littered with Ponzi schemes and exit scams.
Pyramid Structures and Unsustainable Returns
According to TRM’s report, cryptocurrency investors lost roughly $7.8 billion to Ponzi Schemes in 2022. Ponzi schemes are elaborate investment scams designed to lure investors with the promise of generating a high and quick return on investment (ROI) off the back of a non-existent enterprise.
Scammers promise investors unrealistic profits, banking on the premise that many of them don’t fully understand how the crypto market works.
Luring Investors Before Disappearing
Before pulling their exit scams, Ponzi schemes and fraudulent projects lure their investors in via marketing and promises of unrealistic profits.
In the crypto space, it is easier to sell such goals as some projects have generated massive ROI for investors. Shiba Inu and Dogecoin rallied by thousands of percentages during the last Bull Run.
With so many success stories in the crypto space, it is easy to see how scammers are able to convince investors that their projects are the next big thing.
Conducting Thorough Research
While cryptocurrency investors lose billions of dollars annually to hacks, rug pulls, Ponzi Schemes and exit scams, you can protect yourself and your investment. As stated earlier, you need to do your own research before investing in any crypto project. Only use the best day trading apps to access the crypto market.
Evaluating the Team’s Credibility
Evaluating the team’s credibility should be the first thing you do when researching a project. The more credible the developer, the less likely the project is a scam. However, if the developer(s) decides to remain anonymous, then you need to dig deeper before investing in the project. Ensure you look at the team’s history before making investment decisions.
Checking the Token’s Use Case and Whitepaper
Utility is essential to the sustainability of a project. A token without use cases will have low trading volume, and this will eventually affect its price negatively. Ensure you find out about the token’s use case before you invest in a project.
Also, ensure you read a project’s whitepaper as you will find information such as the tokenomics, road map, utility and more. Projects without a whitepaper are most likely scam projects.
Analyzing Tokenomics and Liquidity
Staying safe in the cryptocurrency market also involves analyzing the tokenomics and liquidity of a project.
Understanding Token Distribution
You need to understand the token distribution of a project. Usually, tokens are distributed amongst the developers, early investors (private or public sales), the community, and the general public.
Ensure that you look at how the tokens are distributed, as that could help you determine if a project is legit or not. If the project team gets most of the tokens, it could be a scam project.
Verifying Liquidity Locks and Pool Ownership
Locking liquidity makes it impossible for holders of liquidity provider tokens (LP tokens) to withdraw their funds from a liquidity pool. Projects usually adopt this model to prevent developers or early investors from selling their tokens as soon as they go public. The move is designed to ensure that a token has enough liquidity, especially in its early days.
Verify liquidity locks before you invest in a project. Projects without liquidity locks could experience pump and dump.
Relying on Reputable Platforms
When buying, selling, or storing cryptocurrencies, ensure you only use regulated and reputable platforms. Using the best paper trading apps ensures that you don’t become a victim of a rug pull.
Using Established Exchanges for Trading
FTX’s crash last year saw investors lose billions of dollars. To avoid losing your funds, ensure that you only trade on regulated and reputable cryptocurrency exchanges.
Your capital is at risk
Verifying Smart Contracts on Trusted Websites
Before investing in DeFi projects, kindly verify their smart contracts on trusted websites. Some platforms you can use to verify smart contracts include Etherscan, Celoscan, Remix.IDE, Hardhat and Brownie.
Trusting Your Instincts
After carrying out research about a crypto project, you should trust your instinct. It is better you lose out on a potential investment and maintain your capital than lose your capital due to FOMO.
Avoiding High-Pressure Sales Tactics
You need to avoid high-pressure sales tactics that would result in you making irrational investment decisions. Regardless of the sales tactics deployed by the developers and promoters, DYOR and trust your instinct.
Being Skeptical of Unrealistic Returns
“When it is too good to be true, that is because it is too good to be true.” This saying can save you from financial losses. Be skeptical of unrealistic returns. Do not trust any project that lacks a sustainable financial mode.
Diversification and Risk Management
Most investors who lose their life savings to rug pulls, and other crypto scam projects did so because they focused all their efforts in one place. In crypto, just like in other financial markets, you need to diversify your assets and deploy proper risk management techniques.
Spreading Investments Across Different Assets
The cryptocurrency market is expanding, and opportunities continue to increase. You can spread your investments across different assets. You can purchase the leading cryptocurrencies like Bitcoin and Ether while also putting some of your funds in the metaverse, DeFi, and NFT projects. This way, you limit your risk exposure.
Your capital is at risk
Allocating Only What You Can Afford to Lose
Keep in mind that crypto investments could be risky. Hence, investing only what you can afford to lose is recommended. Investing all your life savings in a cryptocurrency project is not advisable.
Staying Informed and Educated
The best way to stay safe in the cryptocurrency space is to stay informed and educated. You need to keep learning about the crypto industry and stay on top of market news.
Keeping Up with Crypto News and Trends
You cannot become a successful investor if you don’t keep up with crypto news. We have numerous reputable crypto news platforms that will keep you informed regarding the latest events in the market.
You can also subscribe to analytics platforms to help you get information about the latest trends in the market. This will help you make informed decisions when investing.
Learning from Others’ Experiences
You can also stay safe by learning from others’ experiences. Several investors have fallen prey to rug pulls and exit scams and have narrated their stories. You can learn from their experiences to avoid similar losses.
Reporting and Taking Action
Simply understanding rug pull, meaning crypto, isn’t enough. You need to report and take action to prevent others from falling victim to rug pulls.
Reporting Suspicious Activities and Scams
If you suspect suspicious activities, the first option is to get in touch with the project team to gain more clarity. This way, you can have all the necessary information before making any decision.
You can report suspicious activities and scams to the authorities. The United States SEC and other regulatory agencies are paying more attention to crypto projects. You can get in touch with the authorities to report suspicious activities and scams.
Raising Awareness in the Community
Crypto projects have communities on Discord, Telegram, Reddit, and Twitter. You can raise awareness within the communities if you suspect possible scam activities.
Rug pull explained – eToro Complete Guide
Now that you know the rug pull meaning and how to stay safe, you should ensure that you only trade with regulated and reputable trading platforms. eToro is one of the most reputable trading platforms in the world and is also regulated. Here are the simple steps to signing up on eToro:
Step 1: Visit eToro “Join Now” page
Step 2: Choose a username, enter your email address, and set a password.
Step 4: Click on the ‘Create Account’ button.
Step 5: Check your email inbox and verify your email address.
Rug pull explained – Conclusion
This rug pull explained and how to stay safe article shares insights on crypto scams and how to avoid becoming a victim. Investors lose millions of dollars to fraudulent developers via rug pulls annually.
However, by knowing the rug pull meaning and following the recommendations in this article, you can stay safe. Ensure that you only invest in projects you trust and understand how they operate. Furthermore, watch out for signs that can indicate that a project might be rug pulled. This way, you can always stay safe and be able to protect your investment.
Your capital is at risk.