What does rug pull mean in crypto and how to avoid it

A lot of crypto investors have fallen prey to a lot of scams that placed a bad reputation on the industry. A lot of dubious crypto entities ‘pull the rug’ underneath the unsuspecting users that lead to financial catastrophes. 

A rug pull is a type of crypto scam that happens when a crypto developer suddenly abandons a project. This leaves users empty-handed while all their investments get stolen. Unfortunately, rug pull crypto occurs quite often and is all because of fraudulent developers. But the good news is that there are clear signs of such scams and you can avoid them to save your investments. If you want to learn more about these types of scams, then here is everything you need to know about crypto rug pulls: 

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How do crypto rug pulls work

Rug pulls are among the most notorious scams in the crypto space. Malicious crypto developers pump the prices way up and then pull as much value out of them as possible. Once users get lured into their scam, they immediately abandon them as their price drops to zero. 

The crypto rug pull is a type of exit scam and decentralised finance exploit that is easy to do and hard to spot. But once you’ll know what to look out for when it comes to this type of scam, you’ll find crypto investing much safer in the future. 

What are the various types of rug pulls in crypto?

There are three main types of crypto rug pull examples. These vary depending on the circumstances and are among the most common ones you can find. Here is a list of rug pull crypto types: 

Liquidity theft 

Liquidity theft happens when crypto creators withdraw all their coins from one liquidity pool. By doing this, it removes all the value placed on the currency by investors which drives all its value down the drain. 

These ‘liquidity pulls’ usually occur in DeFi environments. The DeFi rug pull is one of the most common scams in the industry as well. In this particular case, crypto developers might post on social media or email you directly that a coin will arrive soon. Most of the time, it is a coin that you’ve probably never heard of before. 

The liquidity theft scheme is usually blatant in how they present themselves. They will be relatively unknown and most probably a coin that has no whitepaper to begin with. All you can do is avoid these types of scams and you're better off without them. 

Pump and dump schemes 

Unlike liquidity theft, a pump and dump scheme is more general and best describes what a rug pull is. Its concept is eerily similar to a rug pull but comes in different varieties. 

Examples of a pump and dump scheme are companies misleading with hyperbolic information where a coin’s value is never what the developers claim to be. At first, a lot of users will buy the deceptive coin making the value skyrocket. This is what’s known as the pump stage. 

Soon after, the fraudsters will dump or abandon the project which makes it so that the inflation of prices doesn’t reflect the coin’s underlying value. This causes the prices to crash to zero leaving users empty handed. 

Most likely, the scam starts by hyperbolic claims that the coin is better than the best coins in the market which is difficult to do without some sort of huge event occurring like how Dogecoin’s prices rose. Avoid listening to these claims as they are most likely a pump and dump scheme. 

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Limiting sell orders 

One of the more subtle ways for fraudsters to pull the rug is limiting sell orders. In this case, a developer will code a coin with a smart contract which means that they are the only party that can sell them. This produces false scarcity where people will feel the need to buy immediately in fear of missing out on an opportunity. 

Also, doing this limits who sells the assets and the coin cannot be sold by any investors to other peers that locks them to the asset that can’t be traded. When enough people buy the coin and the founder is sitting on a lot of profits, they dump the tokens’ value and there’s nothing anyone can do to fix it. 

How to avoid crypto rug pulls 

There are a bunch of ways on how to avoid rug pull in crypto. Below are some of the best and proven things you must do to prevent such scams: 

Avoid anonymous or unknown developers 

It’s best to invest in a coin you know who developed and started it all. Coins like Bitcoin and Ethereum are safe because their whitepapers are easy to find online. 

Relatively unknown coins are quite risky to invest in. While there are safer alternatives to unknown coins, you also need to be extra careful when it comes to anonymous developers as they are clear signs of rug pull scams in the crypto space. 

Do background checks 

One of the more simpler ways to approach a rug pull scheme is to simply check the developer. If done correctly, you can easily see their history with other clients and immediately spot something off with their operations. 

Don’t believe in ‘too good to be true’ deals 

There’s a saying ‘ if it’s too good to be true, then it probably is’. Nothing is truer in this case wherein hyperbolic information about a coin is anywhere near its real value. If you read articles and promotions that say the coin will be bigger than the top coins in the market like BTC and ETH, it’s probably not real. This is especially true when it also claims that it’s easy to spike the value in this market. 

Protect your digital assets

Even with the current crypto scams in the industry, there are still many ways for you to protect your assets and keep them from falling in the wrong hands. Securing a good crypto wallet is your first step in keeping your assets safe. 

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Words by: Vonn Consul