Vivian had been investing in crypto for a while. She made some money from Doge and Bitcoin during the bull run of 2020 to 2021. Her ex-boyfriend had convinced her to buy both coins in 2019 when they were still together, and she held them till they blew up.
She had just begun to invest in altcoins. Some of them had made her money, and some had turned out to be losses, but she didn’t mind. She knew that in the game of investing, you can’t win all the time. That’s why when she saw the publicity for “T-coin,” she felt she had to put some money behind it.
Many crypto influencers that she followed were posting about it and hyping it up as the next hot coin. Vivian had her restrictions because the coin was not listed on any major exchanges, just on a decentralised exchange, but most of the predictions from those accounts had been okay, and she didn’t want to miss out on an opportunity to make extra money.
She signed up, moved some Ethereum from her main wallet, and bought a reasonably large amount of T-coin. True to predictions, T-coin was increasing in value. After a month, Vivian felt the coin had appreciated enough and wanted to exit the investment with her profit.
She tried to sell the coins on the decentralised exchange because that’s the only place where it can be traded, but she got a restriction error. Owners of the coin weren’t allowed to sell it. No matter how much she tried, the coin wasn’t sold.
She went on Twitter and saw thousands of other investors complaining that they could not sell the coin. That’s when she heard the term “Rug Pull” for the first time. She had just been rug pulled.
Crypto scams have gotten more creative as the sector has grown bigger. There are different ways individual and organisational investors can be tricked out of their money.
In this article, we talk about rug pulls, how they’re carried out and how they can be spotted.
According to blockchain analysis company, Chainalysis, rug pulls really became popular in 2021 and accounted for $2.8 billion in lost money for victims, which is 37% of all cryptocurrency scam revenue in the year. That’s a lot of dollars lost to fraud.
Rug pulls are very lucrative to crypto scammers because they are pretty hard to spot and easy to fall for.
The criminal either enlists the help of a blockchain developer or is one themselves. They create a cryptocurrency usually on a decentralised exchange where the code which the token runs on isn’t properly audited, and any coin can be traded. They alter the code such that it only executes buy orders or limits the amount of the coin that can be sold.
After creating the currency, they then spend a large amount of money on marketing and publicity to make sure the coin spreads far and wide. In the case of the hypothetical T-coin above, they enlisted the help of popular crypto influencers.
Once the coin gets popular, investors start buying in, not knowing that the popularity is orchestrated and not organic. Also, what they don’t know is that they can’t really sell the coin. Naturally, as more people buy the coin, the value will inevitably increase. This gives investors a false sense of value, and some even add to their investment.
When it is time to sell the coins or convert to regular cash, problems start to arise. It is basically impossible to sell the coin, or there would be a tiny fraction that can be sold. Only the creators of the coin can sell it, and by that time, they’ve already sold it to all the investors who were willing to buy. They have all the cash while the investors have worthless coins.
Rug pulls sound just like pump and dump schemes. The major difference is while pump and dump schemes artificially inflate the price of the coin to attract new investors, rug pulls totally remove the user’s ability to sell the coin. It doesn’t matter if it’s worth $500,000 or $5; it cannot be sold.
A popular example of a rug pull is the Squid Game Series token SQUD that rose dramatically and crashed in a matter of days, with investors unable to sell just before the crash.
How to avoid rug pulls
Avoid anonymous projects
When the faces behind a crypto project are not forthcoming about their identity, it is usually a red flag. According to Fortune, most of the scam cases have been perpetrated by anonymous founders promising fast, easy gains in return for blue-chip cryptocurrencies.
Despite the blockchain promoting anonymity and pseudonymity, it is advisable that you only invest in projects or founders with a proven track record.
This is the first shield against any scam. In crypto speak, you must DYOR (Do Your Own Research). You can’t just take the word of influencers; you have to do personal research on the project and why you think it’ll make any serious money. This will help you figure out if an investment is worth it.
When you start investing in crypto, stop trying to be a millionaire overnight. While you can be involved in projects that will make a lot of money, you should also consider that most projects will make moderate gains, and it can take a while for the investment to yield substantial profit. Even Bitcoin and Ethereum had it rough for years; there’s no reason to be in a hurry.