The cryptocurrency industry is viewed as the wild west of finance, as fortunes can be made or lost in the blink of an eye. It is filled with people trying to profit off each other. Some savages go the extra mile, preying on unsuspecting investors to scam them of their hard-earned money.
Warren Buffet famously said, “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending”. With all the crypto scams out there, there is definitely cause for concern. One of the most common scams is the "rug pull" - a digital sleight of hand that leaves investors holding worthless tokens and empty wallets.
In this guide, we will dive into the treacherous world of rug pulls. Here, you will learn how to spot these scams before they pull the rug out from under you. Read on!
What is a Rug Pull in Crypto?
Picture a scenario of Arabian night, as you are seated on a magic carpet exploring the sky. Just as you are about to reach a desert full of riches, the carpet disappears. This will definitely send you crashing back to earth. This is the perfect way to describe a crypto rug pull.
In definitive terms, a rug pull is a scam where crypto project developers suddenly abandon the project, disappearing with investors' funds. The investors who bought into the dream of the token's utility and potential profitability are heartbroken. All they walk out with are tokens of no financial value.
Understanding How Rug Pulls Work
Several analogies can be used to describe rug pull operations. However, in the crypto context, the developers introduce hidden loopholes into a smart contract. Once they have hit a large sum, they activate the loopholes to abandon the project.
To ensure you fully understand how these scams work, let's break down the stages of a typical rug pull.
Creation and Promotion
The initial step is to launch crypto or NFT projects. They design attractive websites, filling them with false information about utility and the potential for high returns. They aggressively market these projects with articles, videos, and social media posts. To crown it all, they may make use of airdrops to keep unsuspecting investors busy and hopeful for the next big thing.
Investment and Hype
At this stage, the project has successfully lured investors into buying tokens. The excitement starts to build as they paint an image that the project is about to skyrocket, making early investors overnight millionaires. With the potential help of influencers, there is a growing interest, which triggers a wave of FOMO (fear of missing out). This compels more individuals to jump on board the supposed “Golden Opportunity.”
The Great Disappearing Act
Once there is an overflow in investments, the developers execute the escape plan. In the blink of an eye, they withdraw all funds used to back the project and create a large sell order. This plummets the project, allowing the scammer to escape with millions before the community fully realizes the rug has been pulled underneath them.
Aftermath
In the wake of the rug pull, investors find themselves with nothing but junk cryptos or NFTs. Many are left shattered, as they have invested time and money into a scam. Trying to contact the project's team becomes impossible. Their website and contact information would have been wiped. The project soon becomes a cautionary tale as investors share it in forums and social media.
Real-World Examples of Rug Pulls
Cryptocurrency rug pulls are not abstract; they have happened numerous times. Here are five famous rug pull scams that have scared the industry:
OneCoin
It’s not every day you find someone affiliated with a crypto project on the FBI’s most-wanted list. Ruja Ignatova, the infamous creator of OneCoin, is currently wanted for disappearing with billions of dollars from investors. Founded in 2014, Ignatova and her cohorts promised their project was going to rival Bitcoin. Many were attracted to the hype and learned about OneCoin's lack of fundamentals in a hard way.
Thodex
Aside from crypto tokens, exchanges can also rug pull, getting away with traders' money. A prime example is the Turkish cryptocurrency exchange Thodex. In April 2021, the owner of the company, Faruk Fatih Özer, fled Turkey and shut down the exchange. An estimated $2 billion was stolen from 391,000 users.
AnubisDAO
In October 2021, AnubisDAO raised 13,556 ETH (nearly $60 million at the time) from crypto investors owing to the predated Dogecoin. Approximately 20 hours into the investment, the funds were siphoned by the anonymous developers. Sent to a different address, investors were left to count their losses.
Squid Game (SQUID) Token
The Netflix series Squid Game was a big hit. This led to the creation of the SQUID token, which investors and fans of the show were happy to buy. More than 43,000 investors bought the Squid currency, which turned out to be a rug-pull scam. The anonymous developer got away with about $3.3 million.
Mutant Ape Planet (MAP) NFTs
The introduction of non-fungible tokens (NFTs) into the technological space was unprecedented. This intrigued the digital world, as people were willing to explore its possibilities. Within a short period, knockoffs were in the market. The most notable is Mutant Ape Planet (MAP) NFTs, which scammed buyers in a rug pull worth almost $3 million.
How to Spot and Avoid Rug Pulls
"An ounce of prevention is worth a pound of cure," were the famous words of Benjamin Franklin. This applies to every aspect of life, including crypto investments. By being cautious, you avoid falling into rug pull traps. Let's take a look at ways you can sense these scams.
- Do your homework: Before investing in a crypto token, thoroughly research the project. Things to look out for include the team, technology, utility, and community.
- Check for security audits: To prove their legitimacy, projects tend to undergo security audits by reputable firms. An audit lets potential investors know that the project is secure and free from rug pull vulnerabilities.
- Engage with the crypto community: Ensure you ask questions and communicate in crypto forums and social platforms. Discussions on the forums provide additional insights and help spot red flags.
- Be suspicious of unrealistic promises: If the information put out by the project's team sounds too good to be true, it probably is. Don't be swayed by promises such as 1,000x gains. The market doesn't work that way.
- Leverage analytical tools: Use these tools to study the token's trading volumes, liquidity, and other metrics. There, you would be able to decide if their structure is suitable for their goals.
What To Do If You’ve Been Rug Pulled
There is so little you can do after a rug pull. This is because the market is structured to encourage anonymity. Therefore, getting a hold of the scammer(s) might be improbable but not impossible. Although you might not be able to recover your funds, you can try this out.
- Connect with the community: Potentially, the rug pull is identified, and a criminal case is being built; community participants can direct you to the appropriate authorities to file a report.
- Contact the platform involved: Certain platforms tend to offer a percentage of the investments lost to users. An example is SolPad.
- Please share your story with other crypto users and warn them about scam projects.
Key Takeaways
- Rug pulls are scams that see project developers cart away investors’ funds, leaving them penniless.
- Investors can avoid rug pulls by conducting proper research, engaging in community discussions, and leveraging analytical tools.
- If involved in a rug pull, ensure to contact the platform and other investors to know the next line of action.
Disclaimer: The content provided in this article is for educational and informational purposes only and should not be considered financial or investment advice. Interacting with blockchain, crypto assets, and Web3 applications involves risks, including the potential loss of funds. Venga encourages readers to conduct thorough research and understand the risks before engaging with any crypto assets or blockchain technologies. For more details, please refer to our terms of service.