How to identify and avoid crypto rug pull scams

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  • A crypto rug pull scam is a fraudulent scheme in which a cryptocurrency project team raises funds from investors and then disappears with the money
  • Somewhere in the region of US$25 billion has been lost to crypto rug pulls
  • Be on the lookout for red flags, such as unrealistic returns, vague or missing whitepapers

Crypto rug pull scams are a growing problem in the cryptocurrency market, with unsuspecting investors losing billions of dollars. A rug pull scam is when a fraudulent cryptocurrency project team absconds with investors’ funds, leaving them with worthless tokens and no way to recover their investment. One of the most famous crypto rug pulls is the Squidcoin rug pull. According to Comparitech, somewhere in the region of US$25 billion has been lost to crypto rug pulls. This article will explain what rug pull scams are, how they work, and what you can do to protect yourself from becoming a victim.

What is a Crypto Rug Pull Scam?

A crypto rug pull scam is a fraudulent scheme in which a cryptocurrency project team raises funds from investors and then disappears with the money, leaving investors with worthless tokens. The fraudsters build trust with investors through false promises of high returns, fake partnerships, and impressive-looking websites and social media profiles. Once the project has raised enough money, the team disappears, leaving investors with no way to recover their investment.

How Crypto Rug Pull Scams Work

Crypto rug pull scams are typically carried out by a team of fraudsters who create a cryptocurrency project that appears to be legitimate. They use a variety of tactics to build trust with investors, such as creating impressive-looking websites and social media profiles, claiming to have partnerships with well-known companies, and offering high returns on investments.

Once they have raised enough funds, the team disappears, leaving investors with worthless tokens and no way to recover their investment. The fraudsters typically use a variety of tactics to make it difficult for investors to track them down, such as creating fake identities, using multiple addresses and accounts, and hiding behind anonymous proxies.

The Squidcoin rug pull

On the 17th of September 2021, Netflix debuted a streaming show called Squid Game. The Korean production quickly found popularity on the streaming service and beyond. It was the talk of every platform where people aligned with pop culture conversed. Squid Game gave birth to many memes and other internet content. The popularity of the show was abused in a rug-pull scam.

Within about a month of the show’s debut, a new cryptocurrency token based on but unrelated to the show, Squidcoin, popped up. Squidcoin enjoyed a meteoric rise from 1 US cent in late October to a whopping US$2856 in one week. Surprising sure, but not alarming as the show was top-rated, breaking records in the process. Squidcoin had every hallmark of the next big thing in crypto.

Enthusiasts could buy Squidcoin but be required to hold it for a period before selling the tokens they had purchased. This is known as a vesting period. This meant they had no way to cash out of the token. Just over a week after hitting its high, the cryptocurrency crashed in what was later revealed to be a rug-pull fraud scheme.

Rug pulls are prevalent

Ponzi schemes can also be included in rug pulls because, ultimately, the creators make off with people’s money. Ponzi schemes differ in that they initially pay the promised returns. However, the payments are made from the investment of incoming members rather than any profit generated by the project. Comparitech counts 523 rug pull-related scams to date in cryptocurrency.

The resurfacing of the OneCoin Ponzi scheme’s Ruja Ignatova reminds us of the biggest rug-pull fraud case in cryptocurrency history, fleecing people of an estimated US$4 million. Recently Africrypt made away with US$3.6 billion worth of investor crypto. GainBitcoin struck to the value of US$3 billion, fleeced from Indian crypto buyers.

How to Avoid Crypto Rug Pull Scams

You can take several steps to protect yourself from becoming a victim of crypto rug-pull fraud.

Do Your Own Research

Before investing in any cryptocurrency project, it’s essential to do your own research and verify all claims made by the project team. This includes checking the team’s background, looking at their track record, and reading up on the project’s technology and use case. Be sure to go beyond just reading the white paper.

Check the Token Fundamentals

Look at the token economics of the project, including the total supply, the distribution model, and the token vesting period. If the fundamentals do not make sense, or if the team has a large portion of the tokens locked up, it may be a red flag.

Check for Red Flags

Be on the lookout for red flags, such as unrealistic returns, vague or missing whitepapers, and fake partnerships or testimonials. If something seems too good to be true, it probably is.

Inspect the details

The details of a token go beyond the white paper and token fundamentals. One sign many rug pulls and other scams have in common are simple things like spelling and grammatical errors in their material. This may be on the website or in the white paper.

Stay Away from Ponzi Schemes

Ponzi schemes are another common type of cryptocurrency fraud. They promise high returns with little or no risk, but in reality, they only pay returns to early investors using later investors’ funds. Stay away from projects that promise high returns with little or no risk.

Use Decentralized Exchanges

If you invest in a cryptocurrency project, use a decentralized exchange (DEX) to trade your tokens. DEXs are more secure than centralized exchanges, as they allow you to control your own funds and are less susceptible to hacks and scams.

Scrutinise the exchange too

A small caveat is that some rug pulls have gone as far as creating exchanges to scam people. So before dealing with a cryptocurrency exchange, you want to ensure that the exchange is what it purports to be and not a fraud.

Crypto rug pull scams are a growing problem in cryptocurrency, with investors losing billions of dollars. To protect yourself from becoming a victim, it’s essential to do your own research, check for red flags, pay attention to details and stay away from projects that promise high returns with little or no risk. Additionally, using a verifiable decentralized exchange to trade your tokens can help to reduce your risk further

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Kudzai G Changunda
Kudzai G Changundahttp://www.about.me/kgchangunda
Finance guy with a considerable interest in the adoption of web 3.0 technologies in the financial landscape. Both technology and regulation focused but, of course, people first.
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