Rug pull is one of the risks people face when they invest in crypto assets. Nowadays, people are increasingly facilitated to invest in digital assets and cryptocurrencies. However, behind the convenience provided by some trading platforms, you still need to be careful not to experience losses.
Check out the review below to find out one of the risks of crypto investment.
What Is Rug Pull and How It Can Happen
The term originated from an English phrase, which literally means “pulling the carpet”—which would bring down the person standing on it.
This form of crypto asset-related fraud occurs when developers abandon the project they made. This is done after they managed to pump up the price and pull as much value out of the investors.
In this case, the project owner will sell the crypto assets of the developed project simultaneously and in large quantities. As a result, the value of assets owned by investors will be worthless.
Also called exit scam, this crime generally afflicts tokens on decentralized exchanges (DEX), which rely on a collection of assets stored in the DEX. In this case, usually, fraudsters who pose as developers will design a promising project that attracts many users. The project was then distributed and attracted many investors so the price of its assets rose.
When the price of the asset skyrockets to the point that is considered to have met the satisfactory level of the fraudsters, they will then sell all the assets they owned simultaneously—in a massive amount. They will then destroy the price of this asset and it makes all investors who have saved funds suffer from losses. For instance, SQUID, a coin meme crypto asset that was quite popular in early October 2021.
The name SQUID itself was referring to one of the popular series on Netflix titled “Squid Game”. However, this coin does not have a direct connection with the series.
Long story short, the price of this token suddenly skyrocketed because of the enormous investors who saw the promotion of this coin through social media. Between October 26 and November 1, this coin’s price soared more than 23 million percent. This excessive price increase was up from the previous one cent to $2,861.80.
However, it did not last long. The price spike then turned into a drastic price decline, it even hit the $0.003 mark. Naturally, everyone considered SQUID a scam. On the other hand, it is suspected that the developer of this token has abandoned their project and sold the tokens they owned. From that sale, they earned $3.3 million.
Furthermore, after further research, it turned out that the white paper of this project was also filled with various grammatical errors and was not compiled professionally. Coinmarketcap has now pinned a warning on the SQUID website to make users aware of potential fraud.
How Rug Pull Works and Its Development
As mentioned above, this crypto fraud method is common in DEX. Developers will create tokens and listings on DEX, which are deliberately paired with popular cryptocurrencies, such as Ethereum. Unfortunately, there will be investors who believe in it and immediately exchange their Ethereum for a registered token.
When many investors exchange their Ethereum, the developer will withdraw everything from the liquidity pool so that the price of the listed coins will be zero. Usually, investors will be sure of the new coin because the sly developers do a lot of surreptitious ways. For example, recruiting artists and creating a stir or creating a buzz on social media like Twitter or Telegram.
They usually give a large amount of liquid capital in their group so that investors will easily believe, even though they are being deceived. Furthermore, this scam can develop, especially in DEX, because the new token there can be registered with a cheap fee and without an audit so it is different from a centralized cryptocurrency exchange.
Tips and Tricks to Avoid It
The following are a few things to take into consideration to identify projects that have the potential to commit fraud in the crypto market.
Research the developer team behind a project
As a first anticipatory step, you must always research the figure or organization behind a project, in this case, you can also find out people who establish and supervise the asset. You must know the people in the organizational structure, their history, and their activities.
Monitor network data and information
Secondly, monitor the available network data and information—in the context of the blockchain network. You can observe the on-chain activity of a crypto asset, including trading volume data in recent days, total liquidity, to the number of DEX registering it as a legitimate crypto asset.
Usually, projects that have the potential for exit scams are only listed on a few DEX and have a small trading activity. In addition, you can also use block explorer to see the holders of crypto assets and how many of them.
Avoid FOMO and diligently read the news
Lastly, you have to balance the data you are looking for with the current news. In this case, you can find out the reaction or response of the crypto community to a certain asset, monitor Reddit or other popular forums, and diligently read and check the news from trusted crypto sites.
All of that is aimed at avoiding the fear of missing out (FOMO) which will probably lead you into a rug pull scam.