As more and more individuals put their money into cryptocurrencies, crypto rug pulls have grown more popular in recent years. Crypto rug pulls are a type of exit scam that involves malicious developers coding hidden backdoors into their tokens, withdrawing all the coins from the liquidity pool, or quickly selling off large amounts of tokens in order to drive down their price and leave remaining investors holding worthless assets.
A rug pull is succinctly defined as “a scam where the team pumps the project as much as possible before disappearing with funds, leaving investors with a worthless asset” (with possibly no exit liquidity) source. The term might have come from the idiomatic expression pull the rug out (from under someone) or to suddenly take away important support from someone. A rug depicts the resource taken away.
Rug pulls come in various flavors but they usually involve some aspect of liquidity limiting or rapid selling where the price depreciates very quickly. Some examples of rugs can be found here. Please note that just because a prominent member of a team announces they’re leaving the project or stepping down, that doesn’t exactly mean it’s a rug. When Charlie Lee sold his LTC at the top, the project didn’t die.
Therefore, it is important for all potential crypto investors to understand how they can protect themselves against these types of scams before investing any money into digital currency projects. To do so, they will need to know the different types of rug pulls and how to detect them.
Hard and soft rug pull
There are two main types of crypto rug pulls: hard pulls and soft pulls.
Hard rug pulls are a type of exit scam that can be particularly devastating to investors. They involve malicious developers coding hidden backdoors into their tokens, which allow them to quickly withdraw all the coins from the liquidity pool. This allows them to take advantage of unsuspecting investors who may not be aware of the backdoor.
Soft rug pulls, on the other hand, are when token developers dump their crypto assets quickly. This is done to devalue the token which leaves remaining investors holding a much less valuable asset than what they initially invested in. While this may not be
How to detect a crypto rug pull
1. Look for hidden backdoors: Hard rug pulls involve malicious developers coding hidden backdoors into their token, so look out for these.
2. Check the liquidity pool: If all the coins in the liquidity pool have been withdrawn quickly, this could be a sign of a crypto rug pull.
3. Look out for sudden price drops: If you notice that the price of a token suddenly drops drastically, it may be due to token developers dumping their crypto assets quickly – also known as soft rug pulls.
4. Know when to stop investing: When you start noticing signs of a potential crypto rug pull, it’s important to know when enough is enough and stop investing in that project before your funds are lost forever.
5 Be aware of recent scams: Make sure to stay up-to-date with news and developments related to crypto scams in order to help protect yourself from falling victim to one in future investments.
6. Research the project thoroughly: Always take the time to thoroughly research a digital currency project before investing any money into it. Look out for red flags that may point to a potential crypto rug pull and try to avoid these at all costs.
7. Follow trusted sources: Make sure that you only follow trusted sources of information about the digital currency project you’re interested in investing in. This will help to ensure that you are getting accurate information about the project and will also help protect you from falling victim to a crypto rug pull.
8. Use reputable exchanges: When trading digital currencies, make sure to only use reputable exchanges as there have been reports of unscrupulous exchanges engaging in crypto rug pull scams.
History of crypto rug pulls
Crypto rug pulls have been around since the early days of cryptocurrency. The first recorded instance of a crypto rug pull happened in 2014, when Bitcoin Savings and Trust Ponzi scheme operator Trendon Shavers was arrested for running an $80 million fraud. Since then, other examples of crypto rug pulls have occurred regularly with some high-profile cases involving large amounts of money being stolen from unsuspecting investors.
In 2017, developers at CoinDash lost $7 million after malicious hackers took advantage of their initial coin offering (ICO) by replacing their payment address with one belonging to the hackers. This caused many investors to send funds to the wrong address and they never received any tokens or refunds. In 2018, Kucoin exchange users lost more than $150 million due to a smart contract bug that allowed malicious actors to withdraw funds from various wallets connected to the platform’s ICO system without authorization.
In 2020, QuadrigaCX exchange founder Gerald Cotten passed away unexpectedly leaving behind over $190 million worth of customer deposits locked up on his encrypted laptop as he was the only person who had access to it. Without prior knowledge about how these digital assets were stored and secured, this incident left thousands of people unable to access their funds and sparked a wave of criticism against the management of the exchange.
In 2021, an estimated $7.7 billion was stolen from investors in rug pull cryptocurrency scams. These investors thought they were putting their money into respectable enterprises, but they ended up having their investment opportunities snatched out from under them. According to the findings of Solidus Labs’ Rug Pull study from 2022, an average of 350 fraudulent crypto tokens were generated each day with the intention of defrauding millions of investors.
Conclusion
Regardless of how it is done, crypto rug pulls are a serious problem that can lead to millions of dollars worth of digital currency being lost in an instant. As such, it’s important for investors to be aware of common tactics used by malicious actors in order to spot and avoid any potential rug pulls before they occur. By following the above tips, investors should be better able to protect themselves from falling victim to a crypto rug pull and keep their digital currency safe. By staying vigilant and doing your due diligence, you can protect yourself from crypto rug pulls and ensure that you make well-informed investments in the future. Good luck!
