Over the past few years, as new crypto projects are getting introduced daily, rug pull has become more popular. The crypto market experienced more than 10 rug pulls at the beginning of 2023, which left a lot of investors devastated as their hard-earned funds went down the drain. In 2023 alone, millions of Dollars have been stolen as a result of this disaster called the rug pull.
A rug pull in crypto refers to when an NFT or crypto developer creates and hypes a project to attract investment and then suddenly shuts down, taking all the accumulated investments with them. As a crypto investor, your best bet to avoid this disaster is to understand what it means and know the potential red flags to watch out for. So what is rug pull in crypto and how can it be avoided? This guide provides you with in-depth knowledge of everything you should know.
Understanding rug pull in crypto
The term “rug pull” was forged from the phrase “pulling the rug out”. When a rug is pulled out from under someone, it will surely leave the person off-balance and scrambling to get a grip on something. Now, let’s apply this knowledge to the crypto space. What is rug pull in crypto?
Rug pull is a scam where a cryptocurrency or even an NFT developer hypes a digital project to entice investors. Unspececting investors proceed to trust them and invest in the project, only to abruptly shut down, taking investor money and assets with them. Many of these scam schemes seem legitimate and very enticing at first until the minds of people behind the crypto project get corrupted and they suddenly decide to drain investor funds.
How does a rug pull work?
Below, we highlighted the steps showing what a rug pull may be like in reality, from the setup of the project to the scammers vanishing with their unsuspecting victims’ money:
1. Setup
The scammers start by creating a new, fake cryptocurrency/digital coin/token or DeFi project. This project often comes with all the basic features that real, trustworthy, and legal crypto projects offer. This includes a very attractive website, a detailed white paper, and a roadmap of their goals that promises a lot of innovative features.
2. Marketing and hype
The scammers will then aggressively promote and market the token or project to the public on social media outlets like Telegram, YouTube, and Reddit, or through reputable crypto influencers and other online forums.
3. Influx of buyers
As the hype steadily builds, unsuspecting traders and investors buy and invest in the project, which increases the overall value of the token or the total amount of money sealed into the project.
4. Withdrawal
Once the crypto project has amassed enough capital, which often runs into millions of dollars, the malicious actors abruptly withdraw the money from the liquidity pool or crypto project’s reserve. Alternatively, they may execute an operation in the smart contract that is of advantage to them and detrimental to others.
5. Disappearance
The developers and insiders involved in the crypto project scam then disappear with no trace. Sometimes, they may even delete their websites, social media accounts, as well as other imprints of the project.
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Hard rug pulls vs soft rug pulls: The forms of rug pulls
Rug pulls can either be a hard or soft one. A hard rug pull happens when a cryptocurrency developer or an NFT developer has no plan to ever complete a project and aims at scamming investors from the onset. In this case, the developer may “hardwire” a project’s code to make an avenue vulnerable to theft.
Contrarily, a soft rug pull generally doesn’t even have code-level fraud. Rather, soft pulls are likely to depend on marketing hype to falsely increase the value of a crypto project, and then the developers and founders shut down the project and abscond with the money. Nonetheless, the result of both the hard and soft crypto rug pull is investor losses.
What are the types of crypto rug pull?
Rug pulls typically fall into any of the following categories:
1. Dumping
Dumping is a kind of soft rug pull. Here, the developers of a crypto project hype it to entice investors to invest their funds in it and promote trading activities through different marketing tools. Social media and influencer marketing will take the lead here, with the project also creating a Discord or Telegram community around the project. After inflating the coin of NFT’s price/value, the developers quickly sell off their supply of the token, making the token’s value to tank.
Investors will then become stuck with worthless tokens. The process of creating and dumping projects can span hours or even years, depending on the developers. Also, dumping may look like regular market volatility instead of deliberate scams.
2. Limiting sell orders
A good example of a hard rug pull is limiting sell orders. Essentially, this scam scheme depends on a project’s developer incorporating restrictions on selling in their crypto’s code. Here, although investors can keep buying the token, they can’t sell it, unless a developer of the project allows it. These scammers will then dump their tokens whenever they want, leaving their investors stuck with worthless assets.
3. Liquidity stealing
Generally, projects hosted on any DeFi trading platform would require a reservoir of crypto tokens to execute trades and loans. Although these tokens are secured and protected with smart contracts, developers of the project can create loopholes in the smart contracts, authorizing them to embezzle the pool of crypto tokens from their investors. This is called liquidity stealing and it is generally considered as a hard rug pull since the developers of the project created it with malicious intent from the onset.
Notable examples of crypto rug pull
Now that you understand what is rug pull in crypto, let’s discuss some examples of the most notable rug pulls in the history of cryptocurrency. With billions of Dollars lost into crypto rug pull, there is no shortage of examples to give when it comes to scam crypto projects. Listed below are the most prominent ones that have been witnessed in recent years.
1. Thodex
Now uncovered as a scam project, Thodex was once one of the largest crypto exchanges in Turkey. After this exchange was discovered to be a fraudulent one, the founder, Faruk Fatih Ozer, absconded to Albania. Ozer allegedly defrauded the users of his platform of more than $2 billion in funds.
Before he ran away from Turkey, Ozer’s platform tried to calm the fraudulent situation by offering their new registrants millions of dogecoins for free. Unfortunately, this promise was also fake because so many users of Thodex complained that they never received the Dogecoin tokens.
Ozer was arrested in 2022 at a resort in Albania and extradited to Turkey to be prosecuted fully for his fraudulent crimes. In September 2023, he was sentenced to 11,196 in jail for stealing billions of Dollars from investors and users of his platform.
2. OneCoin
In 2014, Ruja Ignatova and her team established a Bulgarian-based cryptocurrency organization called OneCoin Ltd. Ignatova and her team pulled off the fraud by allegedly making false claims about the token and hyping its perceived value to entice investors to contribute their funds towards the project.
In 2017, Ignatova abruptly disappeared and the exchange platform shut down without warning to users, leaving most people in shock. In total, the OneCoin platform is assumed to have cheated its victims of over $4 billion. Now, Ignatova has been prosecuted by the police with conspiracy to commit wire scan, wire fraud, conspiracy to engage in money laundering, conspiracy to execute, and securities fraud.
3. AnubisDAO
In a typical example of a liquidity pooling system, AnubisDAO’s anonymous project developers defrauded investors of approximately $60 million. These developers, who didn’t create any official website or white paper, presented a decentralized currency supported by a basket of assets. After getting an overflow of investor support, the AnubisDAO developers drained the asset’s liquidity pool just 20 hours into the deal.
4. Frosties NFT
Frosties NFT, a popular and colorful NFT collection, was first publicized in 2021. It soon became the favorite of many investors, as it promised long-term utility and outstanding staking features. However, this did not last for long. Mere hours after selling roughly $1.1 million of Frosties, the project was shut down and the founders absconded with all of their investor funds.
In 2022, founders of Frosties NFT, Ethan Nguyen and Andre Llacuna were arrested and charged with plotting to commit money laundering and wire fraud in one of the first-ever NFT rug pull crackdowns in the U.S.
5. Evolved Apes
In 2021, an anonymous NFT developer called Evil Ape absconded after stealing a whopping $2.7 million of investor funds. At first, investors were lied to and fell for a fake NFT project known as Evolved Apes, which was supposed to be a collection of 10,000 cartoon apes that would also include a fighting game.
Unfortunately, Evil Ape lied as the fighting game was never developed. To date, the NFTs still exist and can still be seen on OpenSea, a prominent NFT marketplace.
6. SudoRare
In August 2022, developers of SudoRare, a notable decentralized NFT marketplace, emptied the project’s liquidity pool just six hours after going live. These developers stole more than 514 ETH, which was approximately $815,000 at that time. Also, they deleted all the project’s social media handles and even the websites.
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How can I avoid a rug pull?
Most rug pulls that have occurred were new projects that seemed like exciting investments at first. So as a considerable number of new crypto projects are getting introduced on a daily, you must be extra careful before you invest your funds in any of them.
As simple as it may sound, trading on only reliable platforms (like Bitmama) could save you from rug pulls. This is because most reliable exchanges only list coins from properly vetted projects.
Beyond that, here are some tips that can help you identify a scam project in crypto:
1. Research
The importance of research cannot be underestimated when it comes to investing in cryptocurrency. Since the crypto space is full of anonymity and pseudonyms, fraud is bound to be very common. For this reason, you need to gather as much information as possible before you invest in any crypto project.
This could include researching the developers’ backgrounds, their experience, as well as their past projects. If you have coding and blockchain experience, you can also check out the project specs. Lastly, if the crypto project comes with a white paper, you should give it a read.
2. Remain skeptical
Skepticism can come in very handy when uncovering the veil in any crypto hype. It’s a fact that not every new NFT or cryptocurrency will explode and be the next big thing. Unfortunately, most of them will not make it big. So you shouldn’t invest what you can’t afford to lose in any new project. Prominent tokens like Bitcoin and Ethereum will still lead in the market and remain the best option for any crypto investment.
3. Be patient
One of the major ways scammers are likely to push sales in their scam tokens is by using scarcity as a tool to create a sense of urgency. So these developers use the fear of missing out (FOMO) to their advantage. If you start having this fear concerning a new project in the crypto space, before even having the time to research, then you need to take some steps back. You have to hold on and evaluate what is creating that feeling within you and every other investor. Is the project legit or just one that is solely driven by hype? Your answer to this question should tell you the next steps to take.
Unlike in some other industries, the crypto space doesn’t offer investors a built-in cooling-off period. This means that you can’t revoke or back out after you’ve made a money transfer, most times. So you need to take your time and be as patient as possible so you won’t lose your hard-earned funds.
4. Read disclosures
If the crypto projects come with disclosures, make sure you go through them. This will give you an idea about the project you’re investing in. The SEC has warned and fined crypto organizations for not providing vital information about their projects. So the SEC has made a rule that if cryptocurrency organizations provide investment contracts (in the form of securities) in exchange for crypto tokens, they have to register and comply with the regulations laid down by the SEC.
A rug pull in crypto is simply when crypto project developers unexpectedly and deliberately forsake a project startup after they’ve successfully secured the trust and confidence of their investors. Unfortunately, rug pulls are more common than you think in the crypto space. For this reason, before investing in any project, ensure that you do in-depth research about it. Even though there’s no guarantee that you’ll uncover every scam, you’ll still have better chances at avoiding bad crypto deals if you research it thoroughly.
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