What Is a Crypto Rug Pull and How It Works

Rug pulls are a relevant threat in the landscape of cryptocurrency, especially in Decentralized Finance. Crypto rug pulls are a fraudulent circumstance with a significant negative influence, not only on the individual investor but also on the entire space of the whole crypto market. Hence, it is relevant that every investor and crypto enthusiast needs to comprehensively understand the role and impact of rug pulls in the crypto market.

This article will help you clear all your doubts regarding the Crypto Rug pulls. This article will discuss what a Crypto Rug Pull is, how it works, its different types, examples, and different ways to avoid a Crypto Rug Pull.

Crypto Rug Pull

Crypto Rug Pull is a scenario in the crypto landscape, and it is also an exit scam where project founders or malicious developers hype a project, impress investors, and then abandon the project with the invested funds. The term “Crypto Rug Pull” originated from the phrase “ pull the rug out from under you”. 

The California Department of Justice warns investors about crypto scams, including rug pulls, and highlights common red flags to avoid.

The crypto Rug Pull includes a team that increases assets from the public by trading a digital asset, only to disappear or shut down the project by taking investors’ assets with them. 

The main aim of the Crypto Rug Pull is to cheat investors by attracting them into the project and then immediately vanishing it, including their invested money. Overall, its core objective is to create an illicit scenario that benefits developers at the expense of unknowing or innocent investors.

How do Crypto Rug Pulls work?

The Crypto Rug Pulls work by misusing trust and hype inside the DeFi landscape, especially on DeFi exchanges, where developers can easily list a coin and often operate unregulated.

The fraudulent developers make a new token and provide aggressive promotions via influencers, social media, or misleading marketing to boost investor interest in the Token.

The Consumer Financial Protection Bureau (CFPB) reports a sharp rise in crypto-asset complaints, noting scams like rug pulls as a major cause of losses.

>> Top 5 Biggest Crypto Scams In History (if you want to know more about this, click here)

When the demand and investor count of the token increased in the crypto market, the project’s fraudulent developers accomplished a premeditated exit strategy. Then the developer disappears with the stolen money, rarely moving it into unspecified wallets, making them very hard to trace.

Types of Crypto Rug Pull

Crypto rug pulls are mainly categorized into four types, and they are liquidity pulls, Pump and Dump, Fake projects, and Team Exit. 

Team Exit: the team members of the project instantly exit or vanish, quitting participants with no assistance and destroying the coin.

Fake Project: Fraudulent developers develop legal projects, accumulate involvement, and then disappear with the digital token, quitting participation with a valueless coin.

Liquidity pulls: Liquidity pulls are the most common type of Crypto Rug pull and mainly focus on Decentralized exchanges. In this type of scam, the fraudulent developer adds a new coin to the DEX and links it with a popular crypto token such as Ethereum. After that, highly promote the coin, providing investment into the liquidity pool, and raising the value of the coin. When the coin value reaches its peak level, the fraudulent developer withdraws the entire ETH from the pool, leaving other investors incapable of recapturing funds.

Pump and Dump: In this type of Crypto Rug Pull, the scammers artificially inflate the coin price via coordinated purchasing to sell their holdings at the top and crash the value.

The U.S. Government’s report on illicit finance defines rug pulls and explains the challenges law enforcement faces when investigating them.

Famous Crypto Rug pulls 

In the crypto market, Crypto Rugpulls are one of the major issues that result in substantial losses for investors. Last year, the Crypto market encountered approximately $500 million in losses due to crypto rug pulls. Some of the biggest crypto rug pulls are listed below.

Squid Game: A new token arrived in the market named SQUID because of the high popularity of the game “Squid Game”, which was marketed as a play-to-earn mode game. The selling value of SQUID at the beginning was $0.01, and within a few days, the price increased to $2,861. 

The issue was identified when the investors found they couldn’t sell the token, and some of them started their investigation and realized that project developers had disappeared from all significant platforms, such as LinkedIn. The concerns of investors posted on Twitter were blocked, and also shut down apps like Discord groups and Telegram. As a result, the value of the token instantly declined by 99% within a week. The investors were left with the valueless coin, and from the rug pull, the project developers earned more than $3.38 million.

OneCoin: In 2014, OneCoin was introduced by Ruja Ignatova in cooperation with Sebastian Greenwood. This coin was marketed as a revolutionary digital asset and was treated as a Ponzi scheme because of its firm structure. The main business associated with the OneCoin was to sell educational material for cryptocurrency trading, and the investors could purchase these packages worth 100 euros to 118000 euros from anywhere. 

Due to heavy marketing and flashy events, the scam spread instantly around more than 175 nations. In 2017, a U.S. warrant was filed for the arrest of Ruja Ignatova, and she disappeared. As a result, the majority of the workers in the company were arrested because of her missing. Currently, Ruja is on the 10 most wanted list of the FBI, and her partner, Sebastian Greenwood, was arrested in 2017. He was imprisoned for twenty years for his role in the scheme.

BitConnect: BitConnect is one of the most notorious rug pulls, and it was introduced in 2016. For Bitconnect Coin (BCC), investors traded Bitcoin, and they received great yields, evidently assuring up to 40% returns each month. The assertive marketing efforts impressed more investors, and its value reached over $400 million in 2017. The technologies, such as Volatility software and BitConnect Trading Bot, were later proven to be a scheme. It led to the shutdown of the platform and a relevant crash in the BCC token value, which is about 92%, abandoning investors with losses. The developers made more than $2 billion from this scheme.
In one enforcement case, U.S. Immigration and Customs Enforcement (ICE) charged two developers with money laundering after conducting a rug pull on an NFT project.

How to avoid a Crypto Rug Pull?

Crypto Rug Pull is considered one of the main threats in the crypto market. Hence, to protect funds from those types of scams, the investor needs to carry out deep research and exercise caution before investing in any cryptocurrency. The different ways to avoid a Crypto Rug Pull are listed below.w

• Invest in legitimate and trustworthy projects, and always remember that reliable crypto projects do not just appear overnight.

• Carry out deep research regarding the project that you are going to invest in and check whether it has progressively launched other projects.

• Check whether the selected project has a precise and clear vision and also contains a feasible roadmap.p

• Make sure you’ve selected the project that has a significant use case, considered the main selling point. The majority of the rug pulls have no use cases; instead, they have only shills, which are obtained via paid celebrity promotions.

• Effectively comprehend the underpinning blockchain technology, smart contract performance, and consensus mechanism.

After realizing a loss due to Crypto Rug Pull, the user can report on their tax return by explaining the difference between what amount they invested in the token and what they obtained as a capital loss. Later, the investor can utilize that loss to offset their potential financial gains.

Also Read: The Safest Cryptocurrency Wallets

Stay Alert: Protect Yourself from Crypto Rug Pulls Before It’s Too Late

Rug Pulls are a relevant and negative scenario in the crypto market, especially popular in the DeFi platform. It will cause high financial losses for investors and also destroy the recognition of the broader crypto market. Therefore, the investors are required to be more cautious while investing in crypto projects. 

This article provides comprehensive information regarding the Crypto Rug Pull and its potential characteristics. It is significant for investors to understand these concepts and sustain a healthy skepticism in order to decrease the difficulties of falling victim to a crypto rug pull.