The cryptocurrency industry has expanded significantly since its creation. Long-term returns on cryptocurrency investments have, in fact, consistently outperformed those of most other assets. Many investors are always seeking businesses that seem to be headed for success and are still in the early stages. If you’re fortunate, getting engaged early might provide enormous benefits.
As an investor, you must be aware of the many frauds and scams in the industry. Crypto rug pull is a common fraud in the cryptocurrency sector. In 2021 alone, rug pull in crypto amounted to $2.8 billion, making up 37% of the total earnings from cryptocurrency scams.
What is Rug Pull?
The phrase rug pull comes from “pulling the rug out from underneath.” Crypto rug pulls typically occur in projects related to Web3, non-fungible tokens, decentralized finance, and numerous metaverse initiatives. Rug pull in crypto involves a developer that solicits money from investors but then abandons the project before they finish, leaving investors with worthless assets.
The goal of developers of rug pulls is to draw as many retail investors as possible. They often advertise their tokens on social media channels. Developers send depositors’ cryptocurrency to their own wallets after enough individuals have bought into this bogus enterprise.
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How Does Crypto Rug Pull Work?
A rug pull in crypto often starts with developing a new cryptocurrency token posted on a decentralized market coupled with a coin from a well-known platform, like Ethereum. Then, to lure a community of investors, scammers use the marketing capabilities of social media to develop a buzz-worthy, hype-filled advertising campaign across various venues. These frauds often assign membership in Ponzi schemes or dangle false promises of too-good-to-be-true payouts. When a platform gains enough traction, both its user base and the value of its token grow. When the price reaches its high, the core development team liquidates its holdings of tokens and departs with investor monies.
Types of Rug Pull
Liquidity pool rug pulls
Many decentralized exchanges (DEXs) and cryptocurrency lending services rely on liquidity pools. Liquidity pull occurs when the project developers take substantial money from the project’s liquidity pool. If investors want their money back or need to make significant transactions, the liquidity pool is meant to have enough funds to keep the project going. Investors could not be able to get their money back if a developer drains the liquidity, which might prevent a program from working. This type of crypto rug pull can be called a “hard pull.” It happens when developers intentionally conduct fraud from the start.
Pump and dump’ or Dumping
In the “pump and dump” crypto rug, pull fraudsters often aim for a small-cap token already in use. Once the con artists obtain a significant quantity of their chosen cryptocurrency, they can start promoting it on social media. Since these cryptocurrencies have such a small market value, it doesn’t take many purchasers to raise the price significantly.
The scammers will dump all their tokens into the market whenever satisfied. The price of a cryptocurrency is driven down by this strong sell pressure, leaving regular investors with bags of useless tokens.
This is referred to as a “soft pull” since it may be a deliberate fraud due to the volatile cryptocurrency market.
Limiting sell orders
Malicious developers can create a cryptocurrency that holders can only sell when they tell it to. These scammers can use their sell powers to cash out after enough ordinary investors have invested in this coin with harmful malware. This rug pull technique, also known as a “limited sell order” fraud, prevents token purchasers from selling their tokens.
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How to Avoid Rug Pull in Crypto Projects
Crypto rug pulls are more common than you can imagine. Hence, it is best to do everything you can to avoid investing in rug pull projects. Below are some ways to do so:
- Doing thorough due diligence is the easiest method to avoid falling victim to fraud.
- You should be exceedingly wary of any project whose price increases within only a few hours due to pump and dumps.
- Never invest in anything you do not fully understand, and always consider the token’s use case.
- Never get into a project merely because it has increased significantly or promises great profits.
Final Thoughts
Rug pull in crypto is something all crypto enthusiasts and lovers should be careful of. You should not invest in a project just because it is gaining traction. You need to be careful so as not to end up losing your money and resources. Common crypto rug pulls include liquidity pool rug pulls, limiting sell orders, etc.
