Scammers could attempt to exploit cryptocurrency trading’s popularity and adoption.
To steal money from gullible investors, these cyber-thieves use a technique called a rug pull.
A rug pull is a form of cryptocurrency fraud in which a group of people inflates their project’s token before fleeing with the funds, leaving their investors with a worthless asset.
Rug pulls happen when fraudsters inflate a crypto token’s price and then extract as much value as possible before dumping it after its price drops to zero. Rug pulls can be described as a Decentralized Finance (DeFi) attack or an exit scam.
According to Chainalysis a blockchain analysis company, rug pulling only accounted for 1% of the cryptocurrency fraud earnings in 2020. But, this number increased by 37% in 2021. This resulted in $2.8 million in lost revenue for victims.
How the rug pulling scam works
Rug pulling is most common in the Decentralized Finance (DeFi) area, where monies come from a liquidity pool.
A liquidity pool is a market pointer that allows users to place orders for buy or sell of specific tokens.
Since there is no central infrastructure for trading, cryptocurrency exchanges must have a way to maintain order. It is easy to sell the token on a decentralized exchange, as there is no one to audit it.
If the rug pull’s designers have large liquidity resources with substantial capital, they will withdraw all available assets. The coins are then swapped in a different marketplace, making the victims’ identities undetectable.
It’s quite simple to transfer Ether across wallets and become invisible to other users because it’s frequently used as an exchange currency. This will clear all crypto assets and leave the pool empty.
Different types of rug pulling scams
You can identify a scam rug pull as a crypto-investor by understanding the three main types of rug pulls: liquidity theft, limiting sell order and dumping.
This is also known as liquidity theft when token producers remove all coins from the liquidity fund.
This effectively wipes out all the value that investors had invested in the currency and pushes its price to zero.
DeFi sets are where liquidity pulls are most common. A DeFi rug pull is the most common exit fraud.
Limiting sales orders
This tactic can be used by a dishonest developer to scam investors. The tokens are coded so that only the developer can sell them.
The developers wait patiently for retail investors who will use the matched currencies to buy their new cryptocurrency.
Paired currencies refer to two currencies that have been matched for trade. They are removed from their positions when there is sufficient favorable price action.
This is also known as “dumping” when a developer sells off their huge supply of tokens. As a result, the coin’s valuation plummets, leaving remaining investors with valueless tokens.
Dumping is often triggered by a lot of social media advertisements. After the following price rise and sell-off, pump-and-dump schemes are called.
How investors can spot rug pull fraud
As an investor, you should always consider liquidity. Studying a cryptocurrency’s 24-hour trading volume might help you determine its liquidity.
Rug pull scams are popular when a new crypto project has little liquidity, which means it’s difficult to transfer the coin or asset into money.
It’s a good sign to retrace if there’s limited volume, low liquidity, and a small community of over-enthusiastic investors.
Investors must consider the reliability and trustworthiness of crypto-related individuals. Investors should question the long-term history of crypto marketers and developers.
Investors should be wary of creating new profiles or accounts on social media. It’s possible that anonymous project developers are a red indicator.
A crypto fraudster could also program a token that restricts the ability of investors to sell. This is a sign that the project is a scam.
Scam behavior can be hard for people to spot because the selling limits are often hidden in code.
You can check this by purchasing a small amount of the new coin, and then trying to sell it immediately. If it’s difficult to get rid of what you’ve just bought, the endeavor is probably a rip-off.
Before investing in a new project, it’s recommended to spend some time researching new cryptos and performing due diligence.