July 14, 2022
Warning: Don’t Get (Rug) Pulled In
Jenna Mutya
Imagine getting robbed of thousands of dollars in seconds. If you’re a part of the crypto scene, this can happen to you anytime! One of the newest and most popular schemes is called a rug pull, or “scam coin,” a malicious crypto scam where crypto developers abandon a project and run away with investor funds. This action ultimately leaves the investors with a worthless currency. All it takes is for a developer to attract investors to a new cryptocurrency project and immediately pull out to gain financial wealth. To create hype around the project, scam coin promoters may leverage social media platforms to get attention and even inject a substantial amount of liquidity into their pool to cultivate investor confidence. According to Captial, about $2.8 billion was lost to rug pulls in 2021. You might be wondering, are rug pulls illegal? Yes, it’s definitely illegal, and one can even be prosecuted; however, the scary part is that because the crypto sector is still very young, authorities have yet to establish official protocols regarding what to do when these schemes happen. Thus, many criminals have and continue to easily get away with rug pull-related crimes. This reading is your warning sign to get not get pulled in! Below, we have provided a guide that explains the different types of rug pulls and how to identify them.
Three main types of rug pulls:
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Liquidity Stealing
Liquidity stealing occurs when token creators withdraw all the coins from the liquidity pool, which removes all the value injected into the currency by investors and drives its price down to zero.
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Limiting Sell Orders
Limiting sell orders is when a developer codes the tokens so that they’re the only party that can sell them.
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Dumping
Dumping occurs when developers quickly sell off their own large supply of tokens. This drives down the price of the coin and leaves the remaining investors holding worthless tokens.
Common signs of rug pulls:
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Project Appeared Overnight
Typically, rug pulls come out of nowhere, whereas actual legitimate cryptocurrencies take a long time to create and put together.
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Anonymous Developers
If there are anonymous developers, this is a huge red flag. In this case, investors should immediately stir clear and only partake in projects that openly highlights the team behind a project. This will give a good indication of who is involved and who fulfils each role, overall, proving a sense of trust and transparency.
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No Effort For Online Presence
If there is noticeably a lack of effort regarding a project’s marketing strategy, this is a good indication of a rug pull. For instance, scam coin tokens often have a basic, low-effort website that was copied or put together in just a few days. Additionally, if a project doesn’t have a social media presence, this could be another sign. In general, successful tokens engage on all social media platforms to spread awareness and word of mouth (especially because this is generally the only way of marketing a token). If a project isn’t on social media, or simply has a very low following, this could be a rug pull.
How to avoid rug pulls:
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Token Sniffer
Token Sniffer lists all the latest hacks and scam coins, so if you find a project on its list, you know it’s a rug pull.
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Rug Doctor
This site analyzes the code of crypto projects and identifies the most common rug pull strategies. Once Rug Doctor finds a high-risk token, it lists it on its website and breaks down the red flags found in the project.
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Blockchain Explorers (Etherscan or Binance Smart Chain explorer)
By searching for the taken address of a cryptocurrency on a blockchain explorer like Etherscan or Binance Smart explorer, a token tracker page will appear. The tracker will display the total supply, number of total holders, and transfers. By having access to this information, you will be able to view the wallets that are holding the largest amounts of token.