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A crypto rug pull can be a disaster whenever it happens. Unsuspecting investors decide to commit their funds to a project, and all of a sudden, everything turns sour. Learn about crypto rug pulls, the causes of rug pull, and how to protect yourself in this article.
What Are Crypto Rug Pulls?
The term “rug pull” describes a situation where people get shaken off a rug they are standing on until they fall. A crypto rug pull happens when investors are lured into a project through enticing promises and various tactics, only for the token to be dumped on them at the slightest opportunity. Investors often find it hard to suspect this because such projects are made to seem genuine and credible. Some rug pulls tactics are so sophisticated that no one can leave unscathed.
Imagine you checked a crypto data aggregator like CoinMarketCap after work and decided to buy a token because you saw it had increased 10% after being listed on the exchange. After buying the token, the price goes up further, and soon you are sitting on 5x profit in just 3 hours. You get excited that you will be rich, only to return the next morning to find out that your tokens are now worth a few cents. It can be quite an unfortunate situation to be in, but the rug has been pulled under you.
Developers of scam cryptocurrency projects often create a liquidity pool for their tokens, paring them with valuable tokens to facilitate trade. When a user buys the token, they add some amount of the value token in exchange for the worthless token, as they will soon find out. After as many people as the developer wants have exchanged their tokens for worthless tokens, the developer yanks the valuable token, likely, USDT, out of the pool.
Common Rug Pull Tactics
The crypto space is largely unregulated, even though a centralized exchange refuses to list a coin for valid reasons. Scammers usually find a way to sell worthless tokens to the public using DeFi. When the token crashes to zero after the rug, we say those involved have been rugged. The following are the most popular tactics used to perpetrate rug pulls.
Crypto influencers on social media, especially crypto Twitter, range from famous entrepreneurs and music artists to YouTubers with hundreds of thousands of followers. People believe so much in these influencers that they do whatever they say. Despite being told by the influencers after a promotion that the information is not financial advice, they go all in to invest. The price of some crypto tokens goes up by an astonishing 200% whenever a popular Twitter or YouTube influencer Tweets about or makes a video about a project.
Fully aware of the power of influencers, Developers often reach out anonymously with irresistible offers to promote their projects. As soon as the content goes out, the consequent hype is enough for the developers to cash in on and pull the rug.
Authorities have started to come after influencers to pay fines for promoting unscrupulous projects that cost their unsuspecting followers money, but not all influencers are in enforceable jurisdictions. There are still a lot of influencers who promote scam projects to social media followers.
A lot of crypto projects are charismatic. They are built around the intellectual power of the community of founders with a combined history of working with reputable corporations in tech and finance.
Clever criminals often impersonate these persons and add links to their social media profiles to win investors. Convinced about the founders’ identity, unsuspecting investors often invest when they see these profiles. As soon as they put their money in, the black hat developer pulls the rug, and the token goes to zero.
A more sophisticated form of impersonation involved hijacking a popular influencer’s Twitter account to Tweet in favor of a project. The time between the Tweet and the account recovery is usually enough to pull the rug.
Latching on A Hype
Industry trends often triggers crypto bull runs. In 2020, for example, the bull run was triggered by the implementation of the AMM algorithm by Uniswap and the development of an automated yield aggregator through Yearn Finance. Another bull run in 2021 started with the NFT hype.
Some black hats often capitalize on the current trend and create projects with the same technology to swindle investors. They do this by forking open-source code to make a replica to sell as many tokens as possible to a large number of investors who end up buying the worthless token.
Rug pulls executed through a hype are hard to spot, and most people spend money on these projects due to FOMO (fear of missing out). For this class of investors, the new project could be the next Uniswap or NFT craze, but it turns out to be something else.
Crypto honeypots are an advanced form of crypto rug pull scams. The average DeFi user can only spot this if they investigate the smart contract to see the rules that govern the token. They can also check the order book to be sure there are buyers and sellers of the token they intend to sell.
The order books of these DeFi tokens are mostly visible via on-chain data explorers such as Poocoin for Binance Chain and Dexscreener. Unfortunately, not all DeFi users know about these.
Consequently, investors with little knowledge of on-chain tools look for a token that has increased by several hundreds of % in 24 hours and place a buy order on those tokens. When the tokens. Sadly the smart contract has been programmed to buy only, so they cannot sell their tokens. While they watch, devastated at the chart, the price of the worthless token keeps pumping as more unsuspecting novices join the bandwagon.
Overall, crypto rug pools are deadly. You could lose your life savings by investing in the wrong token. Yet you must know the tactics used to investigate DeFi projects properly before putting your money in.
For more complicated crypto scams such as honeypots, it is better to check on data explorers to see that there are buy and sell orders before trading. Also, users should steer clear of tokens with no information on data explorers.
When the maximum transaction possible with a token is limited, i.e., below 5 billion Gwei, you can pass since the project is a honeypot. Projects with a few addresses holding the token are also red flags, so users should steer clear of such projects.
It was a long read, but we are glad you have come this far. Now that you have learned about rug pulls and how to protect yourself, you may also be interested in a new kind of DeFi asset backed by traditional investment.
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These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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