Cryptocurrency rug pulling is a common but unfortunate occurrence on the global crypto market, which results in millions of dollars in losses for digital assets investors.

Learn what crypto rug pulling is, how it works, and how to avoid it.

This is a partner article sourced from Laura Shin Unchained, published by CoinDesk.

What is a Crypto Rug pull?

A rug-pull is a type exit scam in which a team raises money from investors or the public through the sale of a token, only to shut down the project quietly, or disappear suddenly, taking the funds raised and leaving their “investors”, i.e. victims, with worthless tokens.

The rug pull can be orchestrated in a large-scale manner, with criminals using social media influencers to create hype and lure as many victims.

Some scams use key opinion leaders to gain trust in the social media space. Some scams promise high returns or exclusive digital products, such as NFT rug pullings.

Crypto rug pulling can also happen when project owners manipulate the price of a token or coin in order to deceive and then siphon off investors’ investments.

Fraudsters lure victims by a sudden and sharp rise in the value of the token in a short time. The people behind the token will sell it at a high price to make a profit, while “investors”, who are left with steep losses.

Rug pulls are common on DEXes, which allow fraudsters to profit from the pseudonymity.

Types of Rug Pulls

Rug pulls are generally classified into Hard or Soft rug pulls.

The hard rug pulls can be more abrupt and acute. Investors may lose their entire investment within a very short period of time. Soft rug pulling occurs over a long period of time. The core team of developers gives investors a false feeling of security, while they quietly close down.

Rug pulls can be classified into:

  • Liquidity pulls: Malicious agents remove liquidity from a pool of tokens, causing their value to plummet because there are no buyers or sellers.
  • Fake projects: Scammers will create fake projects that look legitimate, collect investments and then disappear, leaving investors with worthless tokens.
  • – Fraudsters inflate the value of a token by buying it at a high price, then sell them when the value is highest.
  • Team Exit The team members of the project suddenly leave or disappear, leaving investors without support and with a collapsing token.

How to Identify and Avoid Rug Pulls

To avoid rug pulling, you need to be diligent and cautious. Here are some ways you can protect yourself.

  1. Research thoroughly: Before investing, investigate the team, technology and goals of the project, as well as its community. Be on the lookout for red flags, such as unidentified teams or a lack of transparency.
  2. Security Audits: Reputable Projects are often subjected to third-party audits. Verify if a project has undergone an audit and check the audit report to identify any vulnerabilities.
  3. Community Engagement: Engage the community of the project on social media or forums. A project that has a strong, active community is likely to be legitimate.
  4. Warning Signs: Be wary of unrealistic returns, excessive marketing and pressure to quickly invest. Avoid FOMO and trust your instincts.

Lastly, only invest money that you can afford not to lose. Some cryptocurrency projects are experimental and the team may pull a soft carpet, meaning they stop supporting a project if the idea fails.

The 5 biggest crypto rug pulls in history

Crypto rug pulls are a popular spectacle, but some scams have left their mark on the industry.

Take a look at the five biggest crypto rug-pulls in history.

OneCoin is a Ponzi scheme based on cryptocurrency that was promoted as a digital currency revolutionizing the financial world. Ruja Ignatova ran the scheme, claiming that OneCoin had a large network of distributors and was backed up by experts.

OneCoin, however, was never backed by any real assets, and distributors were paid simply to recruit new investors. Investors lost more than $4 billion when the scheme collapsed.

Thodex is a Turkish cryptocurrency trading exchange that was hack in 2021. Hacker stole more than $2 billion in cryptocurrency from Thodex’s users. The exchange’s founder Faruk Ozer then vanished. Ozer was arrested in Albania 2022.

AnubisDAO is a DeFi Project launched in 2021. The project was advertised as a high-return investment, but the reality was that it was a scam. The developers disappeared after draining the project’s liquid pool, leaving investors nothing.

Uranium Finance

Uranium Finance is a DeFi that was supposed to expose investors to the uranium industry, but was just another scam. Uranium Finance’s developers drained its liquidity pool, then disappeared. Token holders suffered heavy losses.

Squid Game Token

Squid Game Token is a scam cryptocurrency that was created in 2021. It was inspired by the popular Netflix show “Squid Game”. However, it was just a rug-pull. The developers blocked the token from being sold and took investors’ money.

Crypto rug pullings are a serious threat to the crypto world, as they prey on unwary investors and cause substantial financial losses.

Understanding the different types of rug pulling, identifying early warning signs and using best practices in investing can help you reduce your risk to fall victim to these schemes.