Avoiding Crypto Rug Pulls: Tips & Red Flags To Stay Safe

Investors in 175 countries were promised lucrative rewards, but it was not to be. They’ll build professional websites, compose white papers, and even grow a social media following. They’ll invest in the illusion through fake partnerships, fake team members, fake documentation, fake development updates, fake product releases, and fake IP. Often, these cybercriminals will go as far as generating artificial market activity by buying and selling tokens to control prices.

Some token creators can clearly add some code to their token that will literally not allow users to sell their tokens back to the decentralised exchange, so users can buy them, but they cannot sell. By conducting thorough research, staying vigilant, and approaching new projects with skepticism, you can significantly reduce your chances of falling victim to a rug pull. A legitimate project will not need to resort to such aggressive tactics, and it will encourage potential investors to research before investing. In this blog post, we’ll walk through how to spot the red flags of a rug pull before it happens, the steps to protect yourself, and tips for making informed decisions in the fast-paced world of DeFi. If the project suddenly experiences significant updates—such as unauthorized contract changes or liquidity shifts—remain vigilant, as these could be early signs of a Rug Pull. One of the biggest and most devastating rug pulls in Crypto world happened when the OneCoin exchange was suddenly shut down in 2017 resulting in scam of $4 billion by its founder Ruja Ignatova.

These scams typically occur with newly launched tokens or liquidity pools. Scammers exploit the lack of market regulation and transparency, luring investors with promises of high returns. Regulatory bodies are becoming more aware of rug pulls and other crypto scams, and efforts are underway to create frameworks that protect investors. However, until comprehensive regulations are in place, investors must remain vigilant. However, developers quickly sold off their holdings and drained the liquidity pool, causing the token’s price to plummet to nearly zero within seconds.

The process usually involves the project team or its affiliates pre-holding a substantial amount of tokens. These tokens may have been acquired through pre-mining, private sales, or purchased at a low price during the initial token offering. This sudden influx of sell orders causes the token price to plummet rapidly.

Rug pulls can affect anyone, from an entry-level crypto buyer to a seasoned veteran with years in the space. They can be difficult to spot, especially if you don’t know what to look for. Here are a few things to look out for when scoping out your next purchase to protect yourself from the next big scam. Anyone can list any asset and there is no regulatory authority in place to insure the project is real.

These tools could detect suspicious code before users interact with potentially dangerous contracts. These events not only undermine investors’ confidence, but raise crucial questions about security and transparency in the bull and bear crypto market. Take the necessary precautions and never invest more than you can afford to lose. To learn more about how to protect yourself in the digital asset space, read VALR’s article about cryptocurrency scams and this blog about crypto security best practices.

Compounder Finance Exit Scam

Rug pulls are a common type of scam when a team of Crypto developers create a new token within a project and attract investors to pump its value on the market. In an attempt to halt the devastating effects of rug pulls, RugScreen was launched to help investors spot the warning signs before they lose their funds. After a significant number of investors have swapped their top cryptocurrency for the token, the founders liquidate the liquidity pool which has the unsavoury effect of driving the token’s price down. The token’s value surged tremendously to a whopping 230,000% in just two weeks because the developers had prevented investors from selling.

• There are two types of team exit rug pull crypto scams; gradual and sudden.
• Here’s a comprehensive guide, with examples from popular coins and infamous scams.
• These malicious strategies often combine multiple elements to appear more legitimate.
• Since the event, the website has been taken down, alluding to the fact that it was indeed a rug pull.
• If you can’t find credible information about the team, proceed with caution.
• However, subsequent investigations suggested it was a rug pull, with developers exploiting vulnerabilities in the protocol’s smart contracts to siphon off funds.

Red Flags of a Potential Rug Pull

Although the project might not be completely sheesh casino review abandoned, investors still suffer major losses due to price manipulation and devaluation. A hard rug pull occurs when developers intentionally promote a fake project or token and disappear after draining investor funds. These are premeditated scams where the developers vanish completely, often under fake or anonymous identities, leaving no room for recovery. ThoreCoin was marketed as a promising investment opportunity in the crypto space, offering high returns to its investors. However, it turned out to be a classic Ponzi scheme, where early investors were paid with the funds from new investors.

However, by conducting thorough project research, auditing smart contracts, and adopting secure investment strategies, investors can substantially reduce the risk of falling victim to a rug pull. Learn how to identify, avoid, and protect your investments from rug pull scams in the crypto and DeFi space. Discover types, warning signs, impacts, and essential prevention strategies.

Once the fraudulent platform or cryptocurrency gains traction, they either disappear with investors’ funds or remove all liquidity from the token, making it worthless. Crypto rug pulls are decentralised finance exploits and are considered a common exit scam. These exploits are based on the ability to list tokens on decentralized exchanges (DEX) without a code audit, which later allows the exploitation of vulnerabilities in the token’s smart contracts. The Squid Game token was a more recent example where developers vanished after the token price surged dramatically, leaving investors with worthless tokens. The token capitalized on the popularity of the Netflix series “Squid Game,” attracting a lot of attention and investment. However, the developers disabled selling functionality, preventing investors from cashing out their profits.

Users can also install plugins like Scam Sniffer, which alert users to risks when phishing contracts attempt to authorize interactions through airdrops. The typical Rug Pull tactic involves launching a token project and artificially inflating trading volumes and user numbers to increase its visibility and attract more investors. Once the token’s price rises to a certain level, the team abruptly withdraws a significant amount of funds from the project or sells many tokens, triggering a drastic price drop and shutting down the project. The investors’ tokens lose value, leading to substantial financial losses. Differentiatingbetween hard and soft pulls reveals information on rug pull dynamics.