What are crypto rug pulls and how to avoid them?

Getting scammed is every crypto investor’s nightmare; from Squid Game Token to Crypto Eats, the term rip-off has become a buzzword. We explain what these scams are all about and how you can avoid falling for them.

With the increasing popularity of cryptocurrencies, there are also more and more scammers out to rob uninformed investors of their hard-earned money. In 2021, investors lost at least $3 billion due to carpet pulling, the new cryptocurrency and DeFi scams. Recent examples include CryptoEats — rumored to be a food delivery service that allows customers to pay for their meals with cryptocurrencies and Squid Game. This scam was based on a hit TV show of the same name.

What is a rug pull?

A “rug pull” is a scam where the developers or inventors of a cryptocurrency pull the rug out from under unsuspecting investors. This can happen in a number of ways, but in most cases it takes the form of liquidity fraud on decentralized exchanges (DEX). Once the developer of a DeFi project or cryptocurrency lures investors who provide enough capital to run the project, the rogue developer pulls out and abandons the project. These low-effort projects are orchestrated by people with malicious intent and are up and running in a matter of days. In some cases, they are slightly modified copies of other cryptocurrencies.

Types of carpet covers

1. Cash Theft

Typically, developers invite investors to participate in a project where the funds are “locked up” for a period of time. The developers create a liquidity pool using their newly minted scam token and a legitimate cryptocurrency like ETH. Investors fall for the cryptocurrency scam offer and buy with ETH. The scammers soon withdraw the ETH from the pool, leaving investors with worthless tokens while the developer takes his money in legitimate ETH and escapes.

2. Disabling the ability to sell tokens

Although this scam looks like liquidity theft, the developers add code that makes it impossible for investors to sell their tokens back to the DEX. Unsuspecting investors buy a fraudulent coin, but when the price of the coin rises, anyone trying to sell their coins on the exchange quickly realizes that it is simply impossible. When the price is high enough, the scammer sells all their coins and disappears with the investors’ funds that poured into the project.

3. Developers cash in

Advertisements and promises of “revolutionary” cryptocurrencies attract hordes of investors, who push up the coin’s price. This is what happens when developers create a worthless token and then initially “acquire” a significant amount at a low price. The scammer withdraws their shares either all at once or in small chunks, leaving investors with worthless tokens.

How to spot scammers

There are some cautionary tales that investors can look out for to avoid rug pulls and save their fortunes:

Unknown developers

Take the time to check the credibility of the project developers. Pay attention to their track record and whether they are well known in the crypto community. Always be skeptical when it comes to new social media accounts, the quality of the project website and the white paper.

the project’s roadmap

Keep an eye on the project’s roadmap. Be extra careful if you find that a project doesn’t stick to its standard schedule or changes it from time to time.

Suspicious increase in token price

The main sign of a suspicious project is a sudden or abnormal increase in the token price. For example, if a token goes from 0x to 30x or 60x in a day, you should ask yourself if it’s not a case of “If a deal seems too good to be true, it probably is.” If you come across such a token, chances are there are companies that will either pump it up to attract real investment or dump it afterwards. It is safer to stay away from it.

High percentage of tokens owned by the team

Most carpet moves succeed because the developers put up a high percentage of the funds. In most cases, tokens that are less likely to draw blankets have either very few or no tokens held by the team.

Conclusion

It can be difficult to identify suspicious projects, especially when they look too lucrative. The best way to avoid carpet draft is to use controlled and regulated exchanges by a well-known regulator. In the end, your instinct is the best judge, so you should be more than skeptical and trust your “gut”.

Also read: 5 NFT scams and how to protect yourself from them

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