What is a rug pull in cryptocurrencies and how to identify it?

A rug pull is basically when the creators of a crypto project run away with the investors' money. They leave you there, alone, with useless tokens.

Think of it this way: you are at a fun party. There is a game. It looks great. Everyone is laughing. You want to join too. You put in your money. And just when you think you're going to win... poof. The organizer disappears with all the money.

This is how rug pulls work.

These scams are especially prevalent in the DeFi world. There is no regulation. No one is watching. A group creates enormous expectations about a project. People get excited. They invest. They enthusiastically buy tokens or NFTs.

Then, suddenly, the developers sell everything and vanish. Investors are left stunned. The token price plummets. It feels like a nightmare, but it happens constantly.

Signs that could indicate a rug pull

In the crypto world, which is quite wild, you need to protect yourself. Here are some tips:

1. Mysterious developers

Who is behind the project? Fake profiles? No history? Bad sign. Investigate their background. Check the website and the whitepaper. Quality speaks volumes.

2. No liquidity lock

Good projects lock their liquidity for years. Three or five, ideally. If there is no lock, they can take everything whenever they want. Dangerous.

3. You cannot sell

Some malicious codes only allow selling to certain addresses. The ones of the scammers, of course. Buy a little and try to sell it immediately. If you can't... run.

4. Crazy prices and few holders

Sharp price jumps are not normal. It is also not normal for there to be few holders with large amounts. This makes the price easy to manipulate.

5. Unrealized Gains

Three-digit APY? Sounds too good. And it probably is. It doesn't always mean fraud, but it's suspicious.

6. No audits

A serious project undergoes external audits. Don't settle for what the team says. Who conducted the audit? Is it reliable?

Some famous rug pulls

These frauds are usually meticulously planned. They use influencers. They make eye-catching advertisements.

OneCoin

Ruja Ignatova, "the queen of cryptocurrencies," created OneCoin in 2014. It seemed revolutionary. It turned out to be a gigantic Ponzi scheme. Billions scammed. She disappeared in 2017. No one knows where she is.

Squid Game

In 2021, a token based on the Netflix series emerged. It promised access to an exclusive play-to-earn game. The price skyrocketed. Then the creators liquidated everything and disappeared. The token fell to zero.

Anubis DAO

AnubisDAO promised great profits. It raised nearly 60 million in hours. Suddenly, all the liquidity vanished. The developers fled. They deleted their social media. The website went dark.

How these frauds operate

It's like a vendor who sets up an incredible booth in a market, attracts everyone... and then runs away with the money.

Scammers have various methods:

1. They insert "backdoors" into the code that allow them to control everything.

2. They do "dumping": they sell large quantities quickly, smashing the price.

3. They block sales for everyone except themselves. You cannot leave while they are emptying the ship.

What the law says

In theory, rug pulls are illegal almost everywhere. The SEC in the United States and the FCA in the United Kingdom are pursuing these scams. The perpetrators could face fines and jail time.

The problem is that the crypto world is anonymous. It is difficult to catch the culprits.

In May 2023, the European Union launched MiCA, the world's first comprehensive cryptocurrency regulation. It seems we are making progress. As lawmakers gain a better understanding of this space, it's likely that protections will improve. Let's hope.