How To Avoid A Rug Pull: Rug Pulls goes by many names, pump and dump, exit scams, crypto maneuvers, and many more. There is little difference among these scams but one thing they all have in common is to cart away with your money.
The highest rate of rug pulls happen within the DeFi (decentralized finance ) platforms where decentralization and anonymity is the prevailing factor in the system. The freedom of operation and lack of control by a regulatory body makes it the most suitable platform to pull these scams.
Rug pulls are relatively easy scam scheme to organize. Since anyone can create a new token or a DeFi project on the blockchain, scammers would publish a new token or build a DeFi project and give it a name that is fancy enough to attract investors ( an example of this Wakanda coin or Squid coin, both named after popular movies).
The scammer builds enough online presence and momentum to drive the price of the coin up, after that they empty the liquidity and go into thin air, leaving investors with a worthless fancy-named coin. The whole process is fast and silent – you wouldn’t even notice the money is gone. Some Rug Pulls happened as soon as four days after a token went live.
However, there are hints and signs which tell if a newly published coin could be a Rug Pull. There are not that hard to notice once you know what you are looking for. Some professional traders can detect the red flags with muscle memory. You can do it, too. Keep reading to find out how Rug Pulls work and learn to avoid them before getting anywhere near your cryptocurrency wallet.
The Red Flags – How To Avoid A Rug Pull
It’s only listed on DEX and has few token holders
Decentralised Exchange (DEX) platforms are equipped with Smart Contracts to protect traders’ transactions, however, even those can’t verify the validity of a cryptocurrency coin or token. If you can’t find a token or coin on any trustworthy exchange but is only listed on Decentralised Exchanges, it is better to stay away. To further verify your doubt, you can check how many holders the token has with a block explorer tool. If the number of holders does not pool, say there are five holders in a pool that’s supposed to keep millions of dollars, something fishy is going on.
The project appeared overnight
Most rug pulls usually pop out of nowhere, authentic cryptocurrencies or DeFi projects usually take a long time to develop. Fakes DeFi projects are usually accompanied by a lot of hype, capitalizing on recent memes or movies that are already popular, a recent example of this is the Squid Coin. A project that claims it will revolutionize the crypto world that appeared overnight is probably a rug pull.
Too much promotions
Legitimate cryptocurrencies or DeFi projects thrive on liquidity and results. Rug pulls flourish on attention and FOMO (fear of missing out.)
They will come out with the most energetic influencers and catchphrases and entice you with opportunities that are too good to be true. Some will keep popping up on your social media feeds and invite you to a discord channel just to appear tech-geeky while others rely solely on influencers and celebrities to spread the message.
If this happens, block the users involved and unfollow whoever is promoting the coin. Too much enthusiasm is never a good sign.
Lacks background information
Most rug pulls don’t bother setting up a convincing public profile to list out founders and developers working on the project in case investors decide to seek clarification. If you can’t find any legal information, such as the company’s name, real names of founders, track records of previous projects, etc., it’s a red flag.
Check the liquidity of the project
The liquidity of a cryptocurrency simply means how easy it can be exchanged for a particular coin or cash. Checking the liquidity of a project is a quick and easy way to know if the project can be trusted. To check the liquidity of a project simply check the Order Book and check how the token behaves when an order is placed in respect to it. If the price changes a lot, it means it has low liquidity. The higher the liquidity, the stronger the project. However this is not enough to consider a project not to be a rug pull, you also have to investigate the people behind the project.
Stick with what you know
New cryptocurrency projects always carry that fresh appeal of financial freedom, it feels good to picture yourself holding the new Bitcoin or Ethereum. But unless you have in-depth knowledge about the DEX market or have tons of idle money to throw away, it is best to stay with coins and projects you trust.
Popular exchanges often list new coins and only the ones they trust. Keep up with the news and eventually, you might find something to your liking.