Just like a lot of the other crypto scams we’ve discussed before, this one isn’t new. Crypto is just the newest way to do it.
The rug pull scam gets its name from the expression of pulling the rug out. When you pull the rug out from under someone, it means you disrupt the very foundation they’re standing on. You take it away unexpectedly, leaving them with nothing.
This particular scam involves attracting purchasers to a project and then completely canceling the project before it’s complete. Every purchase is worthless, and contributors are left with tokens or coins that are worth nothing.
There’s a long history of this type of scam in the finance industry. These days, crypto is a common way of conducting it because of the uncertain regulatory environment associated with buying many different types of crypto. Just like with any form of currency, there are risks.
Some crypto projects use smart contracts, which aren’t necessarily contemplated by current regulations. Instead, they’re monitored by other things like computer software and the blockchain. While this comes with many benefits, like reduced transaction costs, more secure payments, and faster transfers, it’s hard to trace funds or recover them if something doesn’t work out.
Unfortunately, dishonest people take advantage of this setup and use it to promise big returns using fake websites with pretty convincing (albeit fake) white papers. Then, after they get their money, they cut and run.
It seems fairly straightforward, but there are actually a few different kinds of rug pulls or exit scams. They’re also called exit scams because developers promise a lot of things and then exit quickly once they have their money.
Ideally, a liquidity pool maintains a balance high enough to reimburse anyone who contributed if they ask for their money back. It should also be high enough to cover any large transactions. But that’s not always the case. In some cases, the developer withdraws a large amount from the liquidity pool or simply drains the entire thing.
When this happens, the project can’t stay afloat, and people can’t be reimbursed. Most projects will implement safeguards to prevent this, but a few don’t. Not to mention, a savvy developer could potentially build loopholes and vulnerable spots in the code because they intend to steal from the beginning.
The pump and dump rug pull scheme involves inflating a coin’s value. Developers will use social media to hype the coin, garner interest, and falsely inflate its worth. Then they sell off their own supply for way more than it’s worth and run with the money. The unsuspecting purchasers are left with a worthless coin.
There are several ways you can spot and avoid rug pulls and ensure you’re not purchasing anything that will leave you penniless (or coinless).
In the crypto space, this is always important. The theories of DeFi are sound, but there are always going to be people who take advantage of others. There’s no guarantee that being a part of any crypto project will be successful. Even the most experienced crypto holders admit they’ve been scammed before.
Just like in TradFi, it’s important to diversify. Don’t put all of your eggs in one basket. At least this way, if you do fall victim to a scam, you’re not out your entire crypto portfolio. Besides, projects can fail for all sorts of reasons, not just because of untrustworthy scammers.
If you assume that any purchase you make may encounter a problem at one time or another, regardless of the reason, you’ll spend your money more wisely and be able to avoid total detriment.
Rug pulls are more common in new projects that haven’t launched yet because they haven’t been scrutinized. For instance, Bitcoin is pretty well-established, it’s been reviewed many times, and it’s used very frequently.
If a project doesn’t have a very long or reliable track record, then there are more likely to be vulnerabilities that haven’t been uncovered yet.
Stick to projects and platforms that have been around for a while, and make sure to use a reliable wallet.
As always, the potential for high reward comes with equally high risk. Don’t give into FOMO.
This one may be tough, but you don’t have to be a computer programmer to attempt to understand a project before diving into it. Check to see if a professional organization has audited the project yet.
The most volatile element of crypto is the human behind it. Do a background check on the developer or anyone else running the project. Sure, people use pseudonyms, but reputable and experienced developers should have references and websites you can check to verify their credentials.
As always, Bitcoin Depot values its customer’s crypto security. Aside from considering the things mentioned above, you can add well-established Bitcoin to your wallet by using a Bitcoin Depot BTM. They’re fast, simple, and convenient ways to purchase Bitcoin. Find the nearest BTM and enjoy confidently!