What is a Rug pull? 5 tips to avoid rug pull in crypto

Cryptocurrency contains made a large impact on the entire world, and its popularity is only growing. But with this new technology comes new opportunities for scammers. Rug pulls have become increasingly popular in the cryptocurrency world, and investors need to be aware of the risks. In this article, we have looked at what a rug pull is, how it can happen, and some ways to avoid being caught out by one.

lochoang

Published Jun 28 2022

Updated Feb 23 2023

6 min read

What is a rug pull?

A rug pull is a type of cryptocurrency scam in which a project's developers suddenly abandon the project, taking all of the funds with them. This leaves investors without any way to get their money back. Sometimes, the developers will even delete the project's website and social media accounts, making it impossible to track them down.

The number of rug pulls have been increasing tremendously

The issue happened from the project's side and not from exchanges or user's end.

Rug pulls are becoming increasingly common as the price of Bitcoin and other cryptocurrencies continues to rise. Many people are looking to get involved in the market and are willing to invest in new projects without doing their research first. This makes them easy targets for scammers.

How do rug pulls work?

How a rug pull occurs in crypto

This can happen in a few different ways. The team may simply disappear, or they may continue working on the project for a little while before suddenly pulling the rug out from under everyone.

For example, they can launch a trendy project to attract investors, only to quickly raise fund and abandon it. Once they've gotten the funds, they will have no reason to keep the project going. This leaves early adopters and investors high and dry.

As smart contract platforms such as BNB Smart Chain allow developers to freely build and launch their own projects. Most of the investors in the cryptocurrency world don't have technical knowledge. This makes them more vulnerable to rug-pulling scams.

What happens after a crypto rug pull?

When a rug pull happened in the cryptocurrency world, it often results in investors losing a lot of money. Rug pulls often happen when a project's team decides to exit abruptly, taking all the funds raised with them

This type of event also damages the reputation of the project and the cryptocurrency market in general. It can also lead to exchanges delisting the affected coin or token. The value of the coins or tokens that they've invested in can drop dramatically, and in some cases, even become worthless.

This leaves investors holding worthless tokens and can cause a lot of financial damage. In some cases, people have even been known to lose their life savings after their investments have been completely wiped out by a rug pull.

Rug pull crypto examples

As the cryptocurrency space is growing, so is the number of scams. While there are many ways to scam people in the crypto space, one of the most common is the rug pull. In a rug pull, a project team member or creator vanishes with all of the funds raised, leaving investors empty-handed.

There have been many rugs pulls in the cryptocurrency space, but some of the most famous ones include:

Squid Game rug pull

The Squid Game token turned out to be a popular rug pull of 2021

In November 2021, a cryptocurrency token associated with the hit Netflix name Squid Game was abruptly delisted from major exchanges, leaving investors holding the bag. The value of the token dropped by over 99% from more than $2,500 to a few cents in a matter of hours, causing widespread panic and loss.

There was more than $3 million USD worth of Squid Game tokens stored on the exchanges that delisted the token and became inaccessible to investors.

This event came to be known as the popular Rug Pull of 2021 and is still remembered as one of the most infamous moments in cryptocurrency history.

Luna Yield rug pull

Luna Yield is a yield farming project that was built on the Solana Network.

In August 2021, a project called Luna Protocol launched on the Ethereum blockchain. The project promised high yield farming returns for users who deposited their cryptocurrency into the platform.

However, just after a few days of launching on a decentralized exchange (DEX) via initial DEX offering (IDO), the team behind Luna Protocol disappeared, taking all of the user's funds with them. This resulted in more than $8 million being lost in total. The fund was transferred via Tornado Cash so it can't be tracked.

5 tips to avoid rug pulls in crypto

There are a few things you can do to avoid being scammed in this way.

First, make sure you do your own research (DYOR) before investing in any project. Look for red flags like a lack of transparency or unrealistic promises and also the background of the team.
Second, don't invest more than you can afford to lose. If a project does turn out to be a rug pull, it's important to remember that you shouldn't put your entire life savings into it.
Third, looking at the liquidity such as 24h trading volume can also be helpful. If there's not much trading activity, it may be harder to get your money out if you need to.
Fourth, there is not much information about the project such as an unclear white paper and roadmap, it might be a rug pull.
Finally, remember that cryptocurrency is still a new and volatile industry. Even if a project seems legitimate, there's always a chance that it could fail. The recent event with Luna is a great example of this.

By following these tips, you can help to protect yourself from rug pulls and other scams in the cryptocurrency world.

FAQs about crypto rug pull

Is a rug pull an exploit?

When it comes to digital assets, a rug pull is considered to be an exploit. This is because it involves taking advantage of investors or users by promising them something that doesn't exist or isn't possible to deliver.

For example, a project might promise to launch a new token on a certain date but never actually do so. Or, a project might create a fake token and promise that it will be listed on a major exchange. These are both examples of rug pulls.

Who is behind a rug pull?

In most cases, it is the project leader or team themselves. However, there have been cases where outside parties have been involved, such as in the case of the now-defunct Bitconnect Ponzi scheme. In that instance, the team behind Bitconnect recruited outside investors to help prop up the scheme, and when it finally collapsed, those investors lost everything.

Rug pulls can be tricky to spot, as often the project leaders will continue to act like everything is normal even as they are making plans to abandon the project. This is why it is important to do your own research (DYOR) before investing in any cryptocurrency project and to be wary of any red flags that may indicate that a rug pull is imminent.

How to get the money back after a rug pull?

It is tricky to get your money back after a rug pull, but it is possible. There is a chance of your fund being returned if you act quickly and follow the right steps.

The first step is to try and contact the team that ran the project. If they are unresponsive, your next best bet is to reach out to the exchanges that listed the project. You can also try social media platforms like Twitter or Reddit. Finally, you can also file a report with the relevant authorities.

It is important to note that rug pulls are very difficult to recover from and there is no guarantee that you will get your money back. However, it is still worth trying if you have lost a significant amount of money.

Conclusion

This article has provided an overview of what rug pulls are and how they work. It has also discussed some of the red flags that investors should look out for. By being aware of these scams, investors can protect themselves from losing their hard-earned money.

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