The crypto space is one kind of a weird space — where many mysterious things are happening.
The rate at which scams are prevailing in the crypto space is just increasing every day.
One of the common scams in the crypto space over the past few years is Rugpull. Many crypto investors have lost their hard-earned money in the crypto space owing to this scam technique.
Most especially for newbies, Rugpull is a scam strategy that cannot be easily avoided in the crypto space.
Undoubtedly, in every sector, there’s always a bad and good aspect of it; thus, it’s crucial to not only be attracted to the good side but also pays much attention to the bad side.
Despite the intriguing concepts that cryptocurrency possesses, it’s not devoid of a deadly and risky aspect, and Rugpull is a major one.
Hence, as an investor in the crypto space, you need to know how to spot Rugpull in any crypto token and also avoid them.
This is what we will be unraveling in this article, so let’s dive in.
What Is A Rugpull?
Firstly, let’s understand the word “Rugpull” in a layman’s language:
For instance, if someone is standing on a rug, and that’s what is making the person stand firmly — then someone suddenly pulls out the rug from the back; we could say that the person has been rug-pulled.
Now, back to the crypto aspect; Rugpull is simply a case scenario where a developer of a particular crypto token pulls out the investor’s fund and leaves them with valueless tokens.
When this happens, the investors in that particular token will have their investment go to trenches, and then, they cannot do anything because the blockchain is decentralized, thus in most cases, it’s somehow hard to track these bad actors and eventually prosecute them.
However, it’s advisable to not fall prey to scams than to fall victim and find a solution. So as I will be walking you through different types of Rugpull, you will understand their format, and of course, know how to spot one.
Related: Crypto Scams: How To Identify And Avoid Crypto Scams
Types Of Rugpulls?
According to the above explanation of “Rugpull”, it’s a way of scamming investors carried out by crypto token developers — whereas they will abscond with investor’s fund and make them bag holders of crypto tokens that have little to no value.
However, there are different ways of rug pulling in the crypto space — which makes the “Types Of Rugpull”. Below is the list of some of the common types of rug pulls.
This is a type of rug pull strategy that usually happens surprisingly. It’s when a particular crypto token developer removes liquid assets from the liquidity pool of the crypto token.
Before I explain further; how it’s been operated, I will briefly explain what liquidity means:
Liquidity is simply “money”, it is what facilitates the ease of buying and selling of a particular crypto asset — without “liquidity”, a crypto asset cannot be traded often.
The liquidity pool is a pool of liquid assets and the crypto asset — that enables them to be traded against each other.
“Liquidity removal” scam strategy is done when the developer of a crypto token withdraws the liquid asset in the pool, and then leaves the investors with a valueless token.
When this happens, the holders of the crypto token wouldn’t be able to sell their tokens to a liquid asset.
The liquidity is generated from the overall buy orders on that token; which will eventually make the price increase in price as well. Hence, when the developer intends to dupe the investors, do remove the liquidity from the liquidity pool.
So it might be a red flag when particular token liquidity is not locked.
Pump And Dump
Pump and dump are also one of the tactics used in scamming crypto investors. This is when the market value of crypto tokens held by them drops drastically due to much selling pressure.
It’s a “rug pull” tactic that’s usually carried out by the token developer, here’s what they do:
They will launch a crypto token, and then build hype around it; when there have been significant holders of the token, the developer sells off their holding.
This is usually possible when the developer is holding a substantial amount of the token supply (50 – 80%). So with that, you could easily spot a particular crypto token that might rug pull in a “pump and dump” aspect.
This can be considered an advanced way of scamming investors. According to the previous types of rug pull explained above, holders could easily realize evil activities that have been carried out on the crypto token.
But “Honey Pot” is different, it’s when there’s a backdoor integrated into the token smart contract. This backdoor is a line of code integrated into the smart contract that enables a set of wallets to be able to sell their token.
When a developer utilizes this rug pull strategy, they will make the price of the token increase in value — which will cause “FOMO” (fear of missing out), and many investors would want to buy the token for profit.
But anyone that bought a crypto token that the smart contract has this “Honey Pot”, wouldn’t be able to sell it back.
Also read: What Are The Most Secure Crypto Wallets
One of the major goals of being in the crypto space is to make a profit, but in the quest for making a profit, many have fell victim to scams.
Hence, it’s important to understand the way of scams in the industry, and how it’s been operated.