What Are Crypto Rug Pulls? How To Protect Yourself

Cryptocurrencies are hot items right now. Everyone wants to invest in crypto - partly because they believe in the technology, partly because they want to make money.

What Are Crypto Rug Pulls? How To Protect Yourself

Likewise, cryptocurrencies are attractive to scammers because they're perfect for moving money easily and anonymously.

One of the biggest crypto scams right now is the "rug pull." It can be pretty lucrative for those who can pull it off, and there's usually a lot at stake.

If you want to protect your funds in 2022, be aware of the crypto rug pull scam.

What is a Rug Pull?

The rug pull crypto scam aims to take investors' money and run. A "rug pull" can refer to either a cryptocurrency itself or broader projects like a crypto exchange or decentralized finance (DeFi) protocol.

Rug pulls have one thing in common - they start hot, gather hype, and collect as much investor funds as possible. Once satisfied, the developers abandon the project and run for the hills.

Most rug pulls are low-effort crypto projects whipped up within a couple of days. Once they become remotely popular and developers can scrape off a few million dollars in coins, they abandon the project and steal investors' funds.

The Distinctions of Rug Pulls

Generally, rug pulls are differentiated by how they affect victims. The broad classifications include:

Siphoning Liquidity

For a cryptocurrency to be tradable or a DeFi protocol to work effectively, its developers need liquidity. They often create liquidity pools, where investors put money in and get some form of reward in return.

Most liquidity pools involve platform tokens and other established cryptocurrencies - primarily, Ether (ETH). Investors pledge ETH to the liquidity pool and get the platform token in return.

When investors pledge tokens into a liquidity pool, the tokens are locked for a period of time. As more people buy the platform token, they spend more ETH and commit to the liquidity pool.

When the developer is ready, they pull the ETH from the pool, leaving just the platform tokens. The platform tokens are essentially worthless, and investors are left holding the bag.

Disabling Token Selling

Just like scams that steal liquidity, these scams aim to defraud investors. Except here, the developer adds some code that prevents investors from selling their coins back. Investors can buy the coin. But, because of the malicious code, only the developer can sell it.

When the price rises and investors try to cash out, they find that they can't sell the coins. When the scammer deems the price high enough, they sell the tokens and walk away with their funds.

Cashing Out on FOMO

Scam project developers work to convince influencers to post about their projects. Some developers create fancy websites and talk a big game about their fake coin. Their coin gets traction, they see price gains, and everyone's happy. Investors get excited and are willing to back it. Once the price hits a certain level, developers cash out.

How to Spot a Crypto Rug Pull Scam

Some of the more common crypto rug pull signs include:

A Short Timeline

When a crypto project or coin becomes a hit overnight, approach with care. Legitimate crypto projects take time to grow and develop. Overnight successes are a red flag.

Anonymous Developers

A good rule of thumb: Don't become involved with crypto projects if you can't identify the developers. Bitcoin is considered the only legit crypto whose developer has remained anonymous. For everything else, if you can't define a clear developer, stay away.

Understandably, some developers want to protect their privacy, but with a little research, you should be able to pinpoint at least one individual or company behind a legitimate project.

Low Liquidity

Always verify a cryptocurrency's liquidity level. Assets with low liquidity levels are difficult to convert to cash. You can check a coin's liquidity by looking at trading data. Pretty easy.

No Social Media Presence

Before investing in a coin, look into its developers' social media presence on platforms like Reddit, Discord, Facebook, Twitter, Instagram, and LinkedIn. Check out their interactions, understand their objectives, and judge for yourself whether they'll be around for a while.

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