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Rug Pull Scamming in Crypto and How to Avoid It

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Reading Time: 4 minutes

‘To pull the rug from under someone’s feet’

A popular English idiom defined in the dictionary as:

To suddenly take away help or support from someone, or to suddenly do something that causes many problems for them.

But what does it mean in the context of cryptocurrency investments? Read on to find out more!

What is a Rug Pull in Crypto?

 ‘Rug pull’ describes Cryptocurrency projects set up to defraud inexperienced investors. It’s a common scam in the crypto space where a developer or creator will promote a project like a new coin or NFT release and then disappear with investor funds. The scammers are difficult to track down mainly due to the decentralized and anonymous nature of blockchain, where people can easily hide their real identities.

So, how can you protect yourself and your investments? Well, you can start by learning more about the industry’s different types of rug-pull scams.

Liquidity Theft

One of the most well-known crypto rug-pulls is liquidity theft. After a large amount of money has been invested in a cryptocurrency project, a liquidity crisis occurs when the project’s developers abruptly remove all of the cash from the liquidity pool used to support the project. No money, no liquidity, no project, game over!

Limit Sell Orders

Selling restrictions are a more subtle kind of “rug pulling.” This occurs when the developers of a project use smart contracts to restrict sales of the project’s token to themselves. In this scheme, investors are locked into the project and given an asset they have no control over and can’t liquidate for profit.

Pumping and Dumping

Pumping and dumping is when the people in charge of a project quickly sell off (dump) a lot of the project’s tokens, usually after a lot of money has been put into the project, and the value of the tokens has gone up (pump). This helps them make money, but it significantly decreases the price of other tokens, making them less profitable and even impossible to sell.

Hard and Soft Rug Pulls – What’s the Difference?

Rug pulls can either be hard or soft. Hard pulls include malicious coding and liquidity theft, whereas soft pulls refer to selling off assets.

When project developers install hidden vulnerabilities in its token, they are committing a hard rug pull. Threatening backdoors are secret vulnerabilities included in the project’s smart contract. It is immediately obvious that the intention is to cheat someone out of their money. Theft of liquid assets could also be defined as a “hard pull.”

Token creators who sell their crypto holdings swiftly are sometimes called “soft rug pullers.” In doing so, the surviving crypto investors are left with a token that has lost most of its value. It’s possible that dumping isn’t a crime in the same way as hard pulls are, but it’s still unethical.

How to Avoid a Rug Pull?

At this point, you know the major types of rug-pulling in cryptocurrency. Now, let’s explore ways to avoid becoming victims of these scams.

Don’t Get Enticed by Price Action or Hype

Before putting your money into any cryptocurrency, including stablecoins or other coins, you should always do your research. Just because a project is trending on every social media platform doesn’t mean it’s legitimate.

Avoid Projects Run by Anonymous Developers

When dealing with projects that have unknown creators, it’s best to stay on the side of caution. Even if there are many high-profile projects with unknown creators, there’s more of a chance they’ll pull the rug out from under you since they have less to lose if their identities are exposed.

Check Token Liquidity

When searching for the best crypto to invest in, remember to verify its liquidity since millions sometimes support genuine coins in liquidity. If you’re in the market for some tokens, this is one statistic you should use to filter your options and make sure you’re not being scammed.

Check Audits

Before committing funds, verify that an independent auditor has done their DD and reviewed the project. That way, we can see whether there are any flaws in the token’s smart contract.

Check if Project’s Development is Fading

Keep a close eye on the project’s development to prevent being left out of pocket after years of investment. You should reconsider your investment position if you see a decline in activity on a project or if its founders appear to be becoming distant, both of which can indicate waning interest and a probable soft rug pull.

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