Rug Pulls - Red Flags to Look Out For and How to Avoid Them

In Guides

Rug Pulls go by many personas: exit scams, pump and dump, crypto maneuver, and possibly many more. There are nuanced differences among these acts, but one thing they have in common is to steal your money.

The most common types of Rug Pulls happen within the decentralized finance (DeFi) system where anyone can start their own enterprise. In fact, the freedom of operation makes it the most attractive platform to pull these scams. Since all transactions are anonymous and there are no intermediaries, the losses are often permanent.

Rug pulls have deceptively simple mechanics. Scammers would publish a new token and give it a fancy name to attract investors. Once the prices go up, they empty out the liquidity pool and disappear, leaving you with a shiny, worthless coin.

There are signs, which tell you if a coin or token could be a Rug Pull. They aren’t too subtle once you’ve learned to recognize bad patterns. Some veteran traders can spot the red flags with muscle memory. 

You can do it, too. Keep reading to find out how Rug Pulls work and learn to stop them from getting anywhere in the vicinity of your wallet.

How Rug Pulls Work

Despite how sloppy Rug Pulls are, it does require some planning for the scam to work. 

Scammers would start by registering a brand new cryptocurrency on a decentralized exchange (DEX.) Some of us may be familiar with Uniswap or Sushiswap. These platforms allow users to publish their own tokens without verifications or audits.

Creating a new token is hard work. Creating a fake coin with a lifespan of a couple of weeks takes almost no effort. 

Most rug pullers only copied and pasted the code of some other coins and then edited the content a bit. Think of it like paraphrasing Wikipedia, but only changing a few sentences.

Once online, the developers would fill the liquidity pool before heavily promoting the new token. They’d flood social media with how much potential their cryptocurrency has and advise you not to miss such a lucrative opportunity.

Of course, nobody ever wants to miss out on anything, let alone a chance to get rich. To remove all doubt, scammers would pair the malicious coin with a popular one like Ethereum. It’s a simple association trick to gain investors’ trust.

People would eventually begin swapping for the new coin and when its price gets high enough, the scammers drain the liquidity pool and vanish. 

The whole process is fast and silent - you wouldn’t even notice the money is gone. Some Rug Pulls happened as soon as four days after a token went live.

The Red Flags

Rug pulls, in general, are more of a psychological manipulation than anything. What they do is inflate their value with empty promises and vouchers from second-rate influencers. The more hype they generate, the more likely they are to pull investments.

Look out for these signs when you’re considering buying a new token:

It’s only listed on DEX and has few token holders

DEX platforms provide smart contracts to protect your transactions, but even those can’t verify the validity of a crypto. If a token in question is only listed on DEX and no other trustworthy exchanges, it’s better to stay away.

You can also check and see how many token holders it has with a block explorer tool. If there are only ten or so holders in a pool that’s supposed to keep millions of dollars, something fishy is going on.

Low liquidity

A legitimate crypto often has at least tens of millions of dollars in its network, even if it’s not one of the most popular. Not to mention they usually have a fair amount of tokens locked in for certain durations.

If a token’s total liquidity looks like some rich kid’s college fund, don’t touch it with a ten-foot pole.

Lacks background information

Most rug pulls don’t bother setting up a convincing public profile in case investors decide to seek self-assurance. If you can’t find any legal information, such as the company's name, real names of persons involved, track records on cryptocurrency, etc., it’s a red flag.

Too much promotions

Legitimate cryptocurrencies thrive on liquidity and results. Rug pulls thrive on attention and FOMO (fear of missing out.)

They will come out with the most energetic vibes and entice you with a fleeting opportunity. Some like to spam your social media feed while others rely on influencers to spread the message. 

If this happens, block the users involved and unfollow whoever is promoting the coin. Too much enthusiasm is never a good sign.

Exercise Caution

Knowing the signs of a potential rug pull can save you a lot of financial dilemmas. Unless you’re an experienced trader who’s spent years in the game, avoid venturing too deep into the DEX space.

Stick with what you know

New crypto often carries that fresh appeal of financial promise. It feels good to imagine holding the next bitcoin or ETH. But unless you have tons of money sitting around to throw away, it’s best to stay on the platform you trust.

Popular exchanges list new coins regularly, and only the ones they trust. Keep up with the news and eventually, you might find something to your liking.

Conclusion

The more vulnerable we are, the more some people will try to take advantage of it. Unfortunately, that’s the reality we have to face even in the crypto world.

The good news is the more experienced you have, the less of a target you become. Rug pulls tend to happen to unsuspecting or new investors. That doesn’t mean the rest are immune to it. Sometimes, all the signs are good, but you still end up stripped of all investment.

One of the best ways to stay out of this mess is to stay in familiar territory and have lots of observation. Get into the habit of watching the market and how a new token is behaving before making financial decisions. Don’t give in to the fear of missing out or the only thing you’d be missing is your hard-earned cash.

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