Crypto Rug Pulls: How to Spot and Avoid Scams

Crypto rug pulls cause billions of dollars of losses for unsuspecting investors. Unfortunately, they’re a common occurrence in the cryptocurrency space. They involve attracting investors to a crypto project, then stealing their funds or leaving them with worthless assets. It can be tough to know when a new crypto project is worth investing in or just a scam. This guide includes examples of rug pulls and tips for identifying them so you know what to look for. A rug pull is a type of cryptocurrency scam where a developer promotes a new project to attract investor money and then suddenly disappears or shuts down the project and takes the investor assets with them. “Pulling the rug out” from under someone means taking away important support suddenly or unexpectedly. In the crypto space, rug pulls have become common in decentralized finance (DeFi), non-fungible tokens (NFT), and Web3 projects. Rug pulls tend to happen more frequently on decentralized exchanges (DEXs), which are part of the DeFi ecosystem. DEXs allow users to list new tokens for free and without security audits, making it much harder to detect scams. Rug pulls can come in a variety of shapes and sizes. You can also have hard or soft rug pulls. Hard rug pulls involve changing the code of the project so the developer can scam investors. Soft rug pulls rely more on marketing and hype to falsely inflate the value of a project, then the founders shut it down and disappear. Since there are so many new projects in the crypto space all the time, it can be hard to know when they’re scams. Security research website Comparitech tracks crypto scams , including rug pulls. According to their research, $27 billion and counting has been lost to cryptocurrency and NFT rug pulls, as of mid-September 2024. The biggest rug pull scam to date is the OneCoin Ponzi scheme. The project’s main spokesperson, Ruja Ignatova, spent about three years promoting OneCoin, a cryptocurrency token that was supposedly going to replace Bitcoin. In 2017, Ignatova disappeared without a trace and still hasn’t been found. It turned out that OneCoin wasn’t a cryptocurrency at all — it didn’t even have a blockchain behind it. It wasn’t traded on crypto exchanges, either. It had its own platform. The OneCoin scheme raised $4 billion and defrauded people of billions of dollars by the time the project’s founder disappeared. It was such a big deal there’s even a BBC podcast about it called The Missing Cryptoqueen . OneCoin isn’t the only example of a big crypto rug pull. There have been plenty others: These examples are only a few of the worst to happen in the last 10 years. Rug pulls and crypto scams are launched all the time, every day even. The lesson you can take away from these big scams is to be extra careful about how you invest in crypto. Let’s look at how you can avoid getting the rug pulled out from under you in a crypto scam. There’s no sure-fire way to identify rug pulls, you just have to be cautious and do some research before investing. Fraud is common in the crypto world because it’s easy to stay anonymous. It can be hard to get info on the developers behind a project for this reason, but you should still do your due diligence as much as possible. This research involves: It can be exciting to invest in a new crypto project before everyone’s heard about it — but there’s also the potential for a scam. Instead of hopping on a new project, try investing in more established projects. Look for an established community. Don’t rely solely on this community though; OneCoin had a thriving online community and it turned out to be a scam. You can also trade on centralized marketplaces like Binance or Coinbase, as they have standards in place to ensure assets are legal and safe. Investing in crypto requires a strong dose of skepticism. Be wary of projects that guarantee unreasonably high returns. Excessive marketing and hype from crypto influencers might be another indicator that it’s a scam. If it seems like there’s pressure to invest quickly, be cautious. The cryptocurrency world is dynamic and exciting, but it’s also rife with scams. Now that you know what rug pulls are, you can avoid getting scammed and be wiser with your investments. A rug pull is a type of crypto scam where developers create a new token or project, attract investors, and then withdraw all funds, leaving the token worthless. It’s common in decentralized finance (DeFi) and new crypto projects. Yes, rug pulling is illegal in many jurisdictions, as it constitutes fraud. However, due to the decentralized nature of crypto, tracking and prosecuting those behind rug pulls can be challenging. One of the largest crypto rug pulls was the Squid Game Token scam in 2021, where scammers made off with approximately $3.3 million after hyping up the token, then withdrawing all liquidity and disappearing. It’s rare for a crypto project to recover after a rug pull, as investor trust is destroyed. Some communities may attempt to revive a project, but it’s challenging without the original developers or any remaining value. To avoid rug pulls, research the project’s developers, check for transparent coding, and look at liquidity and lock-up periods. Projects with anonymous developers, low liquidity, or no audits are higher risk for rug pulls. Rug pullers can make anywhere from thousands to millions of dollars, depending on the amount of money investors have placed in the project. Large-scale rug pulls have led to multi-million dollar losses for investors. In some cases, you can sue for losses from a rug pull, but legal action is complicated due to crypto’s decentralized nature. Jurisdictional issues and the anonymity of scammers often make it challenging to pursue legal recourse.