What Are Rug Pulls? Find Out Everything You Need To Know About The Rising Crypto Scam!

In 2021, rug pulls consisted of 37% of cryptocurrency scam revenue, compared to a negligible 1% in 2020. The term was coined after the expression “pulling the rug out from under”, which means to abruptly withdraw support. Like any other flourishing industry, the Decentralized Finance (DeFi) and Crypto spaces have attracted many malicious actors who have lured investors and successfully scammed large amounts of money with their fake projects. 

What is Rug Pulls?

The term is often thrown over the internet by exasperated investors who have lost their money. But what are rug pulls?

Rug pulls are essentially projects where developers siphon large amounts of money from investors, and then withdraw everything from the liquidity pool, causing the value of the cryptocurrency created for the “project” to drop drastically. They are intricate and manipulative scams that usually occur on Decentralized Exchanges (DEXs).

How long does rug pull last? While rug pulls do not have a general time frame to classify them, any crypto coin suspiciously skyrocketing in price is relatively more likely to be a scam. Here are some examples of the most notorious rug pull scams to take place in recent times:

Thodex

Thodex is a Turkish centralized exchange platform that obstructed its user’s ability to withdraw any and all funds. Shortly after, their CEO disappeared and the platform went dark, resulting in a loss of over $2 billion in cryptocurrency

Squid Game

This scheme was plotted after the latest T.V show “Squid Game” hit the internet, feeding off its hype and creating a play-to-earn token inspired by it. After almost 43,000 investors pooled money into the cryptocurrency, the creators dismantled the token and became completely unreachable.

AnubisDAO

AnubisDAO launched in late 2021, claiming to provide a free-floating currency backed by numerous assets. Despite the project not having a website or white paper as such, and the developers going by pseudonyms, a whopping $60 million was accumulated from investors. Less than a day later, all the funds raised disappeared from the liquidity pool. 

These are just some examples of crypto rug pulls, albeit together they comprise over 90% of the money lost through the scam in 2021.

How can you Detect a Rug Pull and Possibly Avoid it?

Investors can protect their money by looking for tell-tale signs of fraudulency when looking for projects to invest in. Some of the most common indicators of rug pulls are:

• Anonymous Developers: Any successful project depends on its developers. Those with pseudonyms that prefer anonymity might be doing so to evade legal action and escape any sort of repercussions. Unknown developers are very often a red flag and investors must carefully research the team behind any project before putting their money into it. 
• Suspicious Growth: That adage about slow and steady winning the race is true after all! When a completely new project is seen to be gaining popularity in extremely short time frames, feeding off of cultural and internet trends, there is a high chance what they’re selling is too good to be true. 
• Low Liquidity: Determining how fast you can convert the “asset” into cash is vital when investing in a project. It’s also imperative to ensure that proper regulations are placed to prevent the developers from emptying the entire liquidity pool.

A few steps to determine the credibility of a project can go a long way in saving your hard-earned crypto. However, if you do end up losing money in a rug pull, how can you get it back? Though cryptocurrencies are largely unregulated, there are civil and criminal remedies that can be sought to recover the money lost. Every nation has its own guidelines on how to proceed thereafter, but help can be solicited from the right legal authorities.

Proper global legislation is yet to be set up, and as a result, many investors have fallen victim to elaborate schemes all over the world. For this reason, due diligence is always recommended before investing in any crypto project. Lastly, invest wisely, only what you’re willing to lose.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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