How to spot a rug pull

How to spot a rug pull: The cryptocurrency market has created opportunities for thousands of projects and new forms of investment are continuously being created. There is a large number of people pursuing these new projects because they know it is in the developing stage and there are great opportunities to make a huge profit from them. 

Despite all the opportunities that cryptocurrencies offer, there are also risks, losses, and traps that could make you lose your entire investment. In the crypto world, many ill=intention people are looking for ways to make fast money even if it means stealing from others.

The decentralized finance (Defi) and crypto marketplace have attracted its fair share of scammers and bad actors, aiming to lure investors into fake projects known as rug pulls — only to run away with their money.

How to spot a rug pull

Decentralized finance (Defi) is one of the most prone to attacks and scams. As a result, many retail investors who delve into these platforms run the risk of being scammed of their investment due to poor knowledge or misinformation. One of the biggest risks in the Defi world is the Rug Pul. 

What is a Rug Pull?

How to spot a rug pull

A rug pull is a malicious maneuver in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds. Rug pull is when malicious individuals create a token and list it on a decentralized exchanges (DEX) platform e.g Uniswap, then pair it with a leading cryptocurrency like Bitcoin and Ethereum. 

Once there is a significant amount of investors swapping their Bitcoin or Etherum for the token, the creator then withdraws everything from the liquidity pool, making the token price fall to zero. During the scam period, the scammer might even create social media hype about the token and initially inject a substantial amount of liquidity into their pool to cultivate investors confidence.

How to spot a rug pullHow to spot a rug pull

  • Check the liquidity of the project: The liquidity of a cryptocurrency simply means how easy we can exchange it for cash or any other cryptocurrency without difficulty. 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.
  • Research the history of the founder: It is of high importance to research the history of the founder(s) of the project since it is not advised to blindly follow a founder that you know nothing about. It is very common to invest in cryptocurrency because of the high returns, however, this is not a great investment behaviour as any bad investment can cost you your money. Before investing in a cryptocurrency, questions like, who is backing the project, or is there any previous information about any misappropriation in this regard? must be answered. 
  • Sudden fluctuation in the Cryptocurrency price: A rise in price is clearly a good sign for investors, however, a sudden spike in the price of a token is not a good sign as it is likely a trap to lure investors. This is called Coin Skyrocketing. So if we notice an x50 or x100 increase in a single day, this is likely a rug pull project.
  • High Rewards: One common theme of investment scams is the promise of high rewards. We must be careful with high rewards. Different DeFi projects launch and start offering high rewards in their pools. This is because they need higher liquidity to run the scam. So a 400% or 1000% return promise from a DeFi project advertisement should be seen as a red flag for investment. 
  • 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.

For a project to be deemed “unruggable,” it means that there aren’t a significant amount of tokens held by the development team. Without the signature large amount of team-held tokens that could be taken in a rug pull or exit scam, a project could be considered “unruggable”.

Another way to think about an “unruggable” project is if the team renounces ownership of any tokens, like tokens they would have acquired during a presale.

Have you been a victim of cryptocurrency scams? Have you lost funds to fake brokers and merchants, Help is here! Contact DuoLabs for full recovery of your funds today.

Read also how to spot rental property scam

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