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What are rug pulls and how to save yourself from them? – Times of India


Lately, there have been some mind-boggling scams in the crypto market that duped customers out of all their investments in that particular asset class. These are pump-and-dump schemes, commonly known as rug pulls.
We make you aware of the various types of rug-pull scams and ways to save yourself from them.
Firstly, what is a rug pull and how does it happen?
  • A rug pull happens when developers siphon off the investors’ money and abandon the project after a huge amount is allocated to the fake crypto or DeFi project.
  • These projects are generally created by people with malicious intent.

There are mainly 3 kinds of rug pulls :

  • In this type of scam, developers create a liquidity pool with their newly-minted scam token and a valid cryptocurrency, like Ripple.
    • In order to make the crypto tradeable, this liquidity pool is infused with some amount of the currency.
  • When investors are convinced about the new crypto’s worth, they start buying it in lieu of their valid crypto, which is then locked up in the liquidity pool for a specific period of time.
  • When the value of the token rises, the fraudulent developer pulls out an entire amount of valid cryptocurrencies from the liquidity pool.
  • The duped investors are then left with valueless tokens.

2. Disabling the ability to sell tokens

  • In this case, investors purchase hoax digital currency.
  • But developers apply certain codes due to which investors can’t sell their coins back to the exchange.
  • When the price of the currency rises sufficiently, the developer is able to sell his coins, while the investor cannot.
  • The developer then flees, pulling out all the investments.

3. Developers cashing out

  • Here, the project is created by a malicious developer with an unbelievably high value proposition.
  • The project normally involves a token feature or a soon-to-be released token.
  • In reality, the developer creates a worthless token and keeps a huge part of these tokens for themselves.
  • As the price of such an asset rises due to hype and promises, investors gather in large numbers to buy these tokens.
  • Then the developer drains out his shares, gradually to avoid being caught.

Two of the biggest crypto pump-and-dump scams until now are :
Squid game cryptocurrency

  • The price of Squid tokens rose an unprecedented 2,30,000 per cent within 2 weeks.
  • On November 1, 2021, the developers pulled about $3.4 million from investors, and the token crashed from US$2,861 to US$0.01 in just 5 minutes.

BitConnect

  • It was a multi-level, Ponzi scheme where the fraud project crashed in January 2018.
  • BitConnect pilfered nearly $2 billion.

How to identify these rug-pull scams in cryptocurrencies and avoid them?

  • Rug-pull scams appear suddenly from nowhere.
    • These fake projects are mostly accompanied by a lot of hype, about revolutionizing the crypto world.
  • If there are anonymous developers of a project, then they should be considered doubtful and illegal.
  • The liquidity of a cryptocurrency should be verified by looking at its 24-hour trading volume.
    • An extremely low liquidity makes it easier for the developer to manipulate the token’s price.
    • According to Forkast, the rule of thumb is that the trading volume should be at least 10 per cent to 40 per cent of the coin’s total market capitalization.
    • Liquidity of the crypto should be locked, as it eliminates the possibility of stealing tokens.
  • The total value locked (TVL) is another parameter to check the legitimacy. A lower TVL increases the risk of a rug pull.
  • These fake projects have negligible presence on social media and lack genuine community engagement.
  • A project appearing overnight usually has a very short whitepaper, which is indicative of a dubious project.

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