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How to Detect a Crypto Rug Pull

How to Detect a Crypto Rug Pull

Rug pulls, that’s the crypto term for a project that scams investors, have sadly become a huge problem in the industry. Many investors have lost billions of dollars to these scams. The good news is that detecting a rug pull is not particularly difficult for those experienced in the crypto industry. 

In this article, we will cover some of the surefire signs that you are dealing with a project that will rug. 

What is a Rug Pull in Crypto?

A rug pull in crypto simply means a project that scams investors out of their money. Specifically, it refers to when the developers of a project dump all their tokens onto the open market causing a massive price drop and the effective end of a project. 

Rug pull can also be used as the verb “rug” or the present participle “rugging.” It refers to the act of pulling the rug out from someone, which generally refers to gaining a person’s trust and then betraying them. 

8 Signs of a Potential Rug Pull

These are the most common signs you are dealing with a crypto project that will rug. It’s important to note that some rugs will make themselves appear more legitimate, which makes them hard to detect. 

In other words, you still must use caution before deciding to invest in an unknown crypto project. This list will simply give you some things to look for before making an investment.

Anonymous Founders

A cryptocurrency project that has anonymous founders is a red flag, period. 

That’s not to say all projects with anonymous founders will rug – Bitcoin, SushiSwap, and Shiba Inu Coin all have anonymous founders. But you should investigate further if a project has anonymous founders. 

The reason is simple. No one wants their name attached to a fraudulent business. It would tarnish their reputation and could lead to criminal problems as well as civil lawsuits. 

Too Good to Be True

The next red flag with a crypto project is claims that are too good to be true. This mostly applies to decentralized finance protocols. These are the protocols that have APY in the millions.

An APY that high is unsustainable and is too good to be true for any sustained amount of time. 

This doesn’t only apply to APY, though. Other claims that are “too good to be true” in cryptocurrency include the following:

  • “This project will replace the banking system.”
  • “We won’t rug.”
    • They always rug when they say this.
  • “This project will bankrupt Visa.”
    • This might apply to Bitcoin, but no other project is remotely close to disrupting Visa.

Those are just some examples of big statements from small projects that generally don’t hold much weight. If you research enough cryptocurrency projects, then you will begin to get an eye for the projects that seem promising and those that don’t.

Uncommunicative or Confrontational Founders

Uncommunicative founders are another red flag. This isn’t a hard and fast red flag, however, because many scam projects have very communicative founders. 

It’s one of those situations where if a founder is uncommunicative, then it’s probably a rug. 

A confrontational founder, on the other hand, usually indicates a rug at worst and a project doomed for failure at worst. You really should avoid investing in projects that have a founder that likes to pick fights with investors in Discord and Telegram.

A Few Wallets Hold Over 20% of Tokens

The biggest red flag, in our opinion, is when a cryptocurrency project has a very uneven token distribution. If a few wallets hold over 20% of the tokens, then it’s more likely than not a scam. 

It’s 100% a scam if the percentage is over 50%.

Some scammers are smart and distribute the tokens across many different wallets, so you do have to investigate this one thoroughly. Just look for wallets with the exact same number of tokens in them – those are the scammer’s wallets. The lazier scammers have a tendency to just put all the tokens in one wallet, which makes it very easy to spot.

Inability to Sell Tokens

This is a new strategy that scammers use to ensure that no one can sell tokens. They actually write code that makes it impossible for anyone, other than the scammers, to sell the cryptocurrency.

The first project that used this strategy was Squid Game Token a few months ago, but it has now become more common after the success of that rug pull.

Unlocked Liquidity

Legitimate cryptocurrency projects will force the developers to lock their liquidity with a 3rd party for a certain amount of time. The most common 3rd party liquidity locker used at the moment is RugDoc.io, which is considered the best. 

Anyway, locked liquidity means that the tokens given to developers are not able to be sold for a certain amount of time. This prevents the team from immediately dumping the tokens. The general rule is that the more liquidity the developers lock and the longer they lock it the better. 

Projects that don’t lock liquidity are usually rugs. Some rugs lock some liquidity, but they usually have extra unlocked liquidity they can dump for a profit.

Bad Web Design and Poor Social Media Presence

These days cryptocurrency projects all have excellent web design and excellent social media presence. You should be very, very skeptical of projects that still have lorem ipsum text on their website. 

This usually indicates the website design is a template, which is fine. But it also indicates that the developers didn’t even bother to make the site look professional. 

Lorem ipsum text on a cryptocurrency project’s website is a massive red flag. It more or less guarantees a rug pull is in the future. 

The same applies to a poor social media presence. Granted, a lot of scams do have a decent social media presence, so looking at social media isn’t necessarily the best indicator of a scam. 

Nonexistent Audits

Finally, if the project does not have a coding audit, then it’s probably a scam. We cannot think of a single legitimate project that hasn’t been audited. You should also make sure the auditing company is a real company and/or that the audit certificate is legitimate. 

Yes, some of the harder working scammers have forged auditing certificates or even built dummy auditing companies to fool investors that don’t do more than cursory research. 

Infamous Crypto Rug Pulls

There has been a lot of rug pulls in the cryptocurrency industry over the past few years. There was an estimated 1300 rug pulls in 2021 alone. 

These scams began popping up during the ICO bubble in 2017 with cryptocurrencies raising money from an ICO and then disappearing without delivering a project.

In fact, that was before the “rug pull” term was even coined, but we still count it as a rug pull because it’s the same general concept. 

With that out of the way, here are some of the most infamous rug pulls in cryptocurrency history.

Squid Game Token

Squid Game Token was a token on the Binance Smart Chain launched in November 2021. It shares a name with the popular Netflix show “Squid Game.” However, the two have no affiliation with each other

That alone is a red flag.

The Squid Game was meant to be used to play different play-to-earn games that resemble the games found in the Netflix series. Of course, the games were never launched because the scammers ran off with everyone’s money. 

Squid Game had a lot of rug pulling red flags. The team was anonymous, the website was terrible, investors couldn’t sell their tokens for two years, the developers didn’t communicate with anyone, and it was unaudited. 

The fact that investors couldn’t sell their tokens for two years should have been a massive, blinking red flag that the project was a scam. 

The team scammed a little over $3 million USD from investors when they dumped billions of coins on the market. The price dropped from $2,800 to $0.05 in under five minutes. 

OneCoin

OneCoin is one of the only rug pulls that still exists despite the founder and CEO disappearing four years ago, the replacement CEO being arrested for money laundering and fraud, the company running off with $15 billion, and a few other higher ups in the company showing up dead. 

Anyway, the cryptocurrency was launched in late 2014 in Bulgaria by Bulgarian Dr. Ruja Ignatova. It was almost immediately banned by Bulgarian authorities for being an obvious scam. 

The team simply transferred operations to another country and continued the scam. The scam operated a little differently than other cryptocurrency scams. 

Basically, OneCoin is a run of the mill multilevel marketing scam that uses its “new” and “revolutionary” blockchain technology as its main selling point. The project claims to be a blockchain that can rival Bitcoin.

The project isn’t a blockchain nor is it decentralized. All the transactions and records are stored on OneCoin’s centralized server. 

It’s just a regular digital currency. Of course, the only place to purchase it is through OneCoin itself by purchasing a trading course. 

Yes, it’s a rather obvious scam and can barely even be considered a cryptocurrency, but the team stole nearly $15 billion from investors before Dr. Ruja Ignatova mysteriously disappeared in 2017. Dr. Ignatova has not been seen since her disappearance in 2017 – it is believed by many that she fled authorities amid indictments in India and the US or she was murdered by the organized crime figures that likely ran the operation. 

Now, OneCoin is a little different than other rug pulls. It had a highly qualified public founder – Dr. Ignatova graduated with a PhD. from the University of Oxford and worked at McKinsey & Company. 

It was still obvious to those that know about scams that OneCoin was and still is for that matter, a scam. It was simply a multi level marketing scam that used the increasing popularity of cryptocurrency to attract more dupes. 

How To Avoid Investing in Crypto Projects That Will Rug Pull

It’s difficult to avoid investing in crypto projects that will rug pull if you like investing in new decentralized finance protocols. Most investors in newer DeFi protocols understand and accept that rug pulls will happen and rely on the fact that one or two projects returning an absurd amount will cover the losses from rug pulls. 

It’s simply part of investing in new technology. 

Alternatively, many investors knowingly invest in rug pulls and sell their holdings before the founders dump. That’s a risky strategy, but it can prove very profitable if one does not get too greedy. 

If you want to fully avoid crypto projects that will rug, then you should avoid investing in new DeFi protocols that have anonymous founders. Doing that will eliminate 99% of the projects that will rug you. 

You can also only invest in well-established cryptocurrencies with fully doxxed teams. Projects like Bitcoin, Ethereum, Avalanche, Polygon, Binance Smart Coin, and so on. 

Just don’t expect the astronomical returns you find in DeFi investing in projects like that. 

Final Thoughts

That covers it for how you can detect cryptocurrencies that will rug. It may sound complicated, but anyone with a bit of experience in crypto can spot projects that will rug pretty quickly. Of course, there are always projects that unexpectedly rug, but that’s rare. 

The thing is a lot of investors don’t particularly care if a project rugs – the potential upside is enough that makes the risk worth it or the investor plans on exiting their position before the developers rug. 

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