The scariest scam in the world of cryptocurrency is “rug pull.” Recently, scams of this type have been increasing.

So what exactly is a rug pull? It’s when developers or a team suddenly abandon a project, leaving investors behind with worthless tokens. Imagine this: you find a fun game at a party, and everyone is getting excited. Big prizes are prepared. So you put in your money to join the game. But just as victory is getting close, the host disappears with everyone’s money. That’s what a rug pull looks like in the crypto world—something that really happens.

Why does this happen? In the DeFi space, regulations are relatively lax, so developers use influencers to create hype and frenzy around their projects. As interest rises, everyone buys tokens or invests in NFTs. Then, suddenly, the developers sell off their own assets and vanish. Investors are left empty-handed, and the token price crashes. They end up losing almost all of their funds.

There are ways to spot these scams. First, thoroughly investigate the background of the project team. Are the developers known in the crypto world? Do they have a history of accomplishments? Are there any fake social media accounts? The quality of the website and the white paper also matters.

Next, check whether liquidity is locked. If liquidity is locked, it’s difficult for the developers to easily withdraw funds. If liquidity isn’t locked, there’s a risk that everything can be withdrawn at any time.

You can also try seeing whether there are restrictions on sell orders. Buy a small amount of a new coin and try selling it right away. If it doesn’t sell, that’s a warning sign of a rug pull.

You also need to watch out for sudden price swings. Especially for new coins without locked liquidity, prices can spike or plummet. Check the number of token holders on a block explorer. If a limited number of people hold huge amounts, the price is easier to manipulate.

Projects that promise suspiciously high returns are also dangerous. Tokens with triple-digit annual interest rates are typically high risk. If the story sounds too good to be true, it’s highly likely to be a rug pull or a Ponzi scheme.

It’s also important to see whether the project has undergone external audits. If there are strict code audits performed by a trusted third party, you can feel much more at ease. It’s not enough for the development team to simply say, “We’ve been audited.” Find out who the auditors are and how trustworthy they are by doing your own research.

Looking at real rug pull cases shows just how cleverly they’re planned. OneCoin—the “Queen of Crypto”—was launched in 2014 by Ruja Ignatova. It was positioned as a revolutionary cryptocurrency, but in reality, it was a fake Ponzi scheme that stole billions from investors around the world. She disappeared in 2017, and her whereabouts are still unknown. It’s one of the biggest crypto frauds in history.

The 2021 “Squid Game” case is also a typical rug pull. It was a project riding on Netflix’s popular series, selling a token called Squid Coin as access to a “play & earn” game. As the hype grew, the token price surged. But after the developers cashed out their tokens, they suddenly disappeared. Investors received nothing, and the token price dropped to nearly zero.

AnubisDAO was the same. It collected about $60 million within hours after launching as a decentralized autonomous organization. They promised huge profits. But liquidity disappeared rapidly, and the developers ran off with the money. Social media accounts were deleted, and the website vanished. The community was disappointed.

There are several mechanisms behind rug pulls. One is building in loopholes hidden in smart contracts to steal crypto from investors. The second is “dumping,” where scammers quickly sell their assets to crash other investors’ token value. “Pump & dump” schemes are also related—where the price is intentionally driven up and then sold at a high price. A third involves restrictions on sell orders. Scammers allow only certain addresses to sell—then they sell, while other investors are unable to sell.

On the legal front, regulators around the world are fighting rug pulls. The SEC in the United States and the FCA in the United Kingdom are also actively working on it. People involved in rug pulls may face hefty fines, asset seizures, and even imprisonment. However, the decentralized and anonymous nature of crypto trading makes enforcement difficult.

In May 2023, the European Union introduced the world’s first comprehensive regulation called the “Markets in Crypto-Assets Regulation” (MiCA). This strengthens market surveillance and investor protection. It’s also expected that regulations will improve in other regions.

In conclusion, to protect yourself from rug pulls, you must do background research on the project, verify liquidity, test sales, and confirm audits. And above all, don’t forget: if a story sounds too good to be true, there’s always a catch. Crypto investing always requires you to make your own judgment, understand the risks, and proceed carefully.