Crypto Rug Pulls: What Are They & How to Avoid Them

  coindesk.com 2 h

Cryptocurrency rug pulls are an unfortunate but common occurrence in the global crypto markets, resulting in billions of dollars of losses for digital asset investors.

Read on to learn what crypto rug pulls are, how they work, and how you can identify and avoid them.

This is partner content sourced from Laura Shin’s Unchained and published by CoinDesk.

What Is a Crypto Rug Pull?

A rug pull is a type of exit scam that involves a team raising money from investors and the public by selling a token only to quietly shut down the project or suddenly disappear, stealing the raised funds and leaving “investors” (i.e., their victims) with worthless tokens.

Rug pulls can be extensively orchestrated, with nefarious actors leveraging social media influencers and hype-generating campaigns to lure as many victims as possible.

Some scams even use trusted key opinion leaders in the social space to gain trust. Others promise extremely high yields or offer exclusive digital goods, as seen in NFT rug pulls.

Crypto rug pulls can also occur when the project’s owners manipulate the value of a particular token or coin to deceive investors and subsequently siphon off their investments.

Fraudsters often attract victims with a sudden, sharp increase in the token’s value in a short period. Once the price peaks, the people behind the token sell it to generate a profit while leaving “investors” with steep losses.

Rug pulls often occur on decentralized trading platforms, enabling the fraudster to benefit from the pseudonymity of DEXes.

Types of Rug Pulls

Rug pulls can generally be categorized into hard and soft rug pulls.

Hard rug pulls are more acute and sudden. Investors can lose all their funds within a short time. Soft rug pulls happen over a longer period. The core development team gives investors a false sense of security while they quietly shut down.

Common types of rug pulls include:

Liquidity Pulls: Malicious actors remove liquidity from a token pool, causing the token’s value to plummet due to a lack of buyers and sellers.

Fake Projects: Scammers create seemingly legitimate projects, gather investments, and then disappear with the funds, leaving investors with worthless tokens.

Pump and Dump: Fraudsters artificially inflate the price of a token through coordinated buying, only to sell their holdings at the peak and crash the value.

Team Exit: The project’s team members suddenly disappear or exit, leaving investors with no support and a collapsing token.

How To Identify & Avoid Rug Pulls

Identifying and avoiding rug pulls requires a combination of diligence and caution. Here’s how you can protect yourself:

Thorough research: Investigate the project’s team, technology, goals, and community before investing. Look for red flags such as unknown teams or lack of transparency.

Security audits: Reputable projects often undergo third-party security audits. Check if the project has been audited and review the audit report for vulnerabilities.

Community engagement: Engage with the project’s community on social media and forums. A strong and active community can indicate a legitimate project.

Warning signs: Be cautious of unrealistic returns and yields, excessive marketing, and pressure to invest quickly. Trust your instincts and avoid FOMO.

Finally, always ensure you only invest money you can afford to lose. Many cryptocurrency projects are experimental, and sometimes the failure of an idea can lead to the team doing a soft rug pull, which means they quietly stop supporting the project.

5 Biggest Crypto Rug Pulls in History

While crypto rug pulls have always been a spectacle in the industry, some scams left a mark in the industry.

Here’s a look at five of history’s biggest crypto rug pulls.

OneCoin

OneCoin was a cryptocurrency-based Ponzi scheme promoted as a new digital currency that would revolutionize the financial world. The scheme was run by Ruja Ignatova, who claimed that OneCoin was backed by a team of experts and had a vast network of distributors.

However, OneCoin was never actually backed by anything, and the distributors were simply paid to recruit new investors. When the scheme eventually collapsed, investors lost over $4 billion.

Thodex

Thodex was a Turkish cryptocurrency exchange that was hacked in 2021. The hacker stole over $2 billion worth of cryptocurrency from Thodex users, and the exchange’s founder, Faruk Özer, then disappeared. Özer was later arrested in Albania in 2022.

AnubisDAO

AnubisDAO was a DeFi project launched in 2021. The project promised high returns to investors, but it was a rug pull. The developers drained the project’s liquidity pool and disappeared, leaving investors with nothing.

Uranium Finance

Uranium Finance was a DeFi project that promised to provide investors with exposure to uranium mining, but it was yet another rug pull. The developers of Uranium Finance drained the project’s liquidity pool and vanished, leaving token holders with heavy losses.

Squid Game Token

Squid Game Token was a scam cryptocurrency created in 2021, inspired by the popular Netflix series “Squid Game.” However, the token was a rug pull. The developers disabled the token’s ability to be sold, and then disappeared with investors’ money.

Crypto rug pulls remain a significant threat in the crypto space, preying on unsuspecting investors and causing substantial financial losses.

By understanding the various types of rug pulls, learning how to identify early warning signs, and implementing best practices for investing, you can significantly reduce your risk of falling victim to these malicious schemes.

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