7 ways to spot a rug pull
What is a Rug pull?
It occurs when developers create a token paired with standard cryptos, list the token on a DEX, create hype and buzz around it, and after the pump, pull all the funds out after investors' buy-in and disappear with them.
A rug pull can have different facets as exit scams, pump and dump, crypto manoeuvres, and many more. Several ways allow investors to detect a potential rug pull to protect themselves from falling victim to such scams.
Let’s analyze it together and dive a little deeper into it!
Types of crypto rug pull
Before deep diving into the red flags to identify a rug pull, it’s essential to understand the differences among typologies because there is more than one way of committing a rug pull.
1. Liquidity stealing
This is the most common rug pull. A fraudulent project’s founder or developer lists a new token on a dex, paired with a well-known crypto, and creates hype for the new token to attract more investment into the liquidity pool so the token will raise its value. Once the token reaches a new high, the developer removes all the coins from the liquidity pool, eliminating the investor’s additional value to the currency and bringing the token’s price immediately to zero.
2. Limiting sell orders
This type is less usual, but it can happen, so you need to pay attention and be careful. In this scam scenario, the developer codes the new token, so he/she is the only party able to sell.
Therefore, the founder waits for retail investors to use paired currencies to purchase the new crypto assets. Once there has been sufficient upward price movement and the token reaches its peak, the developer exits its position dumping its tokens and leaving behind a worthless token.
A dumping rug pull occurs when the token's creators withhold an enormous stock of the token’s circulating supply. Once the price of the token peaks - the creators quickly sell off its supply, and as a result, the price drops and plummets, and investors are left with a useless amount of tokens. This rug pull is also a pump-and-dump scheme and often occurs following intensive social media promotion.
7 ways to spot a rug pull
Now you know all the types of rug pulls, and you’re ready to understand the several ways of spotting them and keeping an open eye on such scams.
1. DYOR and due diligence
To avoid falling into a scam and losing all your investments, you must conduct all the necessary research. To identify all these fundamental operations, in crypto jargon, we use an acronym DYOR which means do your own research.
What is essential to do before investing is a careful assessment that includes:
The analysis of the team's background (founders and developers) behind the project;
Social media channels and global online presence;
2. Check and analyze the documentation
The second move to realize if you are facing a scam is to evaluate the project’s documentation carefully. The whitepaper must be easily accessible and contain all the information on the project's operation and the token clearly and transparently (such as whether or not the relevant token is listed on which DEX). A legitimate project must have a detailed website where you can consult the roadmap that underlines clear goals, real use cases, and future plans. This allows you to understand the project's long-term vision clearly and whether it will succeed. Be wary of projects with incomplete or poorly designed websites.
3. Do not get caught up in the hype and be aware
To understand if a project is a scam or not, it is important to understand if it adds value to the crypto industry and therefore whether its operation is something innovative or a mere copy of other existing projects. If it were, this is an excellent wake-up call. To see this, you can use two very useful tools:
Rug Doc (it reviews the smart contract code and identifies common rug pull techniques).
Token Sniffer (it compares many tokens and how similar they are).
Coin Sniper (it verifies if a platform is listed on Coin Market Cap and Coin Gecko).
So don’t get caught by FOMO (Fear Of Missing Out), and analyze all the data before investing your money!
4. Looking deeper into code
Another thing to do immediately when you are in front of a new project to understand and find out if it is a rug pull is to scan in detail its smart contract’s code and search if it is audited or the GitHub account for details. If you are not a developer and cannot read the lines of code, you can use a tool, Bscheck, that helps you identify scam contracts.
5. Liquidity and TVL
In investing in a crypto project, you should be familiar with a metric called TVL or total value locked. It is the total dollar amount of coins and tokens invested into the project. This is an important metric, together with liquidity, to focus on. Checking to see if a cryptocurrency has liquidity locked is one of the simplest methods to tell a fraudulent coin from a real cryptocurrency.
If you notice that you’re involved in a rug pull, you should first remove your investment. This can be tricky as it sometimes locks you where you can't withdraw within 48 hours of their initial opening. Secondly, you should probably tell everyone else about the rug pull, sharing your experience on social media such as Reddit or Telegram.
6. Token holders and wallets for whales
This is probably the easiest way to spot a rug pull. Most block explorers let you look at all the tokens and wallets. Pop in the address and see a list of the top token holders. If more than 20% of that token is held by 1 wallet… you could probably be in front of a scam because if that person sells all its tokens -which is a large majority of all- can immediately crash the price.
7. Stay skeptical
After analyzing everything using the steps provided above, there is still an essential tool that you can use to check if a project is a scam or not: your spidey sense. If you think the token is too good to be true…be careful because your instinct matters!
History teaches us that malicious projects are always around the corner. The biggest rug pull and the most successful scam in the crypto industry was OneCoin: a Ponzi scheme that promised high returns rates with minor risks.
Following these tips and paying caution can protect you from falling victim to rug pulls.
Always remember that high rewards come with high risks, and you should research any project before investing.
Keep in touch on the other side!