It almost happened to one of our accounts too. We almost lost our whole investment to a crypto scam called Rug Pull.
Recently we’ve decided to focus a bit more on smaller projects—supporting the community and hopefully making some gains. Unfortunately, not every crypto project is destined for success. With some, it’s only a matter of time before the creator pulls the lever and flushes the price to zero.
Of course, the losses are only on the investor’s side, from the point of view of affiliated groups, it’s all a well thought out get rich quick scheme.
That’s a rug pull in a nutshell. So you want to have the magical ability to read the minds of others and spot these scams right away, right? Unfortunately, it’s not that easy, and crypto scam tokens are a real threat to the community.
In this article, we’ll hopefully lead this to an end, and you’ll learn what a rug pull in crypto is and how to spot one, ideally right away.
What is a Rug Pull in Crypto
A Rug Pull is a type of cryptocurrency scam that happens, unfortunately, very often. According to a 2022 Rug Pull report by Coin Edition, 350 scam tokens are created every day, which accounts for over two million scammed investors since 2020.
In this type of crypto scam, quite often, an anonymous crypto developer promotes a new project—something new and revolutionizing. They artificially pump up the price before unexpectedly disappearing with investors’ money—investors are left with a valueless asset.
How Crypto Rug Pulls Happens
There’s no better place for rug pulls to happen than decentralized exchanges (DEXes).
Since it’s decentralized, there’s no authority overseeing what tokens enter the market. Due to missing regulations, anyone can list their token. To speed up things a bit, they may also create a liquidity pool containing the scammy token.
That doesn’t mean that all the tokens listed on centralized exchanges are safe. They are indeed much safer because the token’s code is examined, and the exchange collects personal data through a process called Know Your Customer or KYC.
The next step is building trust. Huge social media promotion, influencers, paid ads… you name it. There’s no such thing as a budget; they will get it all and more back later.
Once enough unsuspecting investors swap their tokens, it’s time to pull the trigger. The creator and their team hold the majority of the liquidity. Once they decide it’s time, they’ll withdraw it, effectively driving the price to zero.
Are Rug Pulls Illegal?
Depending on the regulations in your country, rug pulls are not always illegal.
Cryptocurrencies and blockchain is a new thing that legislation is still trying to deal with. It may not always be easy to track and prosecute creators for selling their investments.
However, we can all agree that rug pulls are highly unethical.
How to Spot a Rug Pull
Are the people behind the new crypto project credible and known in the crypto community for their hard work and achievements? What’s the utility of the token, or is it just a meme coin?
Spotting a rug pull may not always be an easy task, but there are a few things that can help. Creators of these projects often blindly copy from each other with two objectives—have as little work with it as possible and make as much money as possible fast.
Research the Team Behind the Project
Although it’s true that the first and largest cryptocurrency was developed by an anonymous going by the name of Satoshi Nakamoto, unknown or anonymous project developers are usually a red flag.
Take a look at the project’s website to see who the developers and promoters are.
A strong, experienced team with a proven track record of success can be a good indicator of their good intentions.
We live in a digital era, where ChatGPT can generate a heartbreaking story, and other tools will create profile pictures for you. Don’t forget to check the people to see who they really are.
A good and legitimate team will engage with the community and be as transparent as possible.
The Price is Skyrocketing with only Few Token Holders
When you look at the market graph of a new token, massive swings in price and the price skyrocketing could also be a telltale sign of a rug pull.
Substantial price spikes are also often signs of another scam scheme—pump and dumb.
One thing that can help you tell a good price increase from a bad one is the number of token holders. Use a block explorer to check what wallets caused the price spike and what is the total number of holders.
A healthy project should have at least a few tens of thousands of holders. If there’s a small number of holders, it is susceptible to price manipulation.
Check our masterguide on how to read blockexplorers to see what all it can help you with.
Liquidity is Locked (or is it?)
Having locked liquidity is one of the most important security measures when it comes to crypto projects. It guarantees that no matter what happens, a certain number of tokens are locked away and can’t be withdrawn—rug pulled.
It’s not just a spoken commitment. The creator can say one thing, while the truth can be very different.
Liquidity is secured through time-locked smart contracts, and once the period is over, the tokens become again available for trading.
Ideally, you want to see all the tokens that were distributed to the team locked and at least 80% of liquidity pools also locked.
Since it's a smart contract, you can check it on the blockchain. Check out our guide on How to Check if a Token’s Liquidity is Truly Locked.
Understand the Project’s Goals and Vision
It’s sad to see that many investors focus solely on their potential gain and not on what the project brings to the world. But it goes hand in hand—a project with great usage means longevity and long-term gains.
Check if that’s the case with your chosen project. Is it just another meme coin with no real usage? Or a token riding on the latest trend, such as a Squid Game Token, which was rug-pulled shortly after the launch? That’s where the majority of rug pulls happen.
Unfortunately, there is no crypto rug pull checker that would analyze every project out there; it’s mainly up to your judgment. But sticking to traditional altcoins is a great first step.
No External Audit
This correlates with the fact that the majority of rug-pulled projects are on decentralized exchanges, where there’s no need for an audit.
Having an audit of the code conducted by a third party doesn’t mean that there isn’t a chance for a rug pull to happen. It means that the code doesn’t contain anything malicious.
Auditing companies usually conduct a project-wise overlook, examining the website, token holders, and even community trust. Scoring high in all the categories is usually a good sign.
Biggest Rug Pulls that Ever Happened
Referencing the report by Coin Edition, rug pulls happen on a daily basis. This list is there to realize that rug pulls often happen on huge projects, too, with millions of investors affiliated.
“The Cryptoqueen.” That was the nickname that Ruja Ignatova called herself. She convinced people to invest billions of dollars after telling them she had devised a cryptocurrency to challenge Bitcoin. She vanished two years ago, along with more than $4 billion!
To this day, she is still on the run from the law. She faces up to 90 years in prison if she’s found.
Rug pulls don’t stop at individual cryptocurrencies. There’s a whole Turkish exchange that was rug pulled back in April 2021.
Theodex went missing with investors’ funds worth over $2 billion!
Soon after the creation of the Netflix series Squid Game a crypto token was created based on it.
The token gained much popularity in the first weeks, growing more than 33,600% from a penny to $3.36. But shortly after, creators fled with more than $3.36 million.
Rug pull is a lucrative crypto market fraud in which a crypto developer promotes a new project with a promising future then suddenly vanishes with investors’ money. This illegal practice may not always be simple to be spotted. Therefore caution is needed.
So let’s review the identifying signs on How to spot a rug pull:
- The price skyrocketed in a very short time
- There is a big hype all over social media
- The website looks crappy, and the team behind the project doesn’t look real
- The coin doesn’t have any usability
- The project is built on some kind of trend. Like Squid Game was.