A rug pull is a term used in the crypto community to refer to cryptocurrency projects that turned out to be exit scams. A rug pull is said to have occurred if the developers of a crypto project abscond with investors’ money.
Mostly common in the DeFi (Decentralized Finance) space and executed on decentralized exchanges (DEX), malicious crypto developers dump all the crypto assets and make a run for the door with investor funds. It is common to see prices drop to almost zero after a significant price rally.
Crypto investors also experienced similar rug pull events during the Initial Coin Offering (ICO) bubble in 2018, seeing a significant rise of exit scams and many worthless coins sold to unsuspecting investors.
How to Spot a Rug Pull
Although there is no clearly defined method of identifying rug pull scams in the cryptocurrency space, a retail investor (who are the primary targets of these schemes) may consider some of these factors before investing in any digital asset.
The management company/team behind the project: Almost everyone is a chat away in today’s global village. A search on any social media platform (such as LinkedIn) should provide valuable insight into any of the project developers, their track record, previous projects and so on. The trick is simple.- if you are having a hard time getting any visibility into the team behind a project, they probably do not plan to be around for long.
Study the white paper: White papers are public documents containing the nitty-gritty of any project to be launched into the cryptocurrency space. It throws some light into the inner-working of the project and how they intend to be profitable. Although they may be a little too technical for the average investor, the white paper should provide an overall idea of what the project is all about. Suppose you cannot make sense of a project’s white paper. In that case, it’s either gibberish or you simply do not understand the project’s technicalities, and that is fine. You should not be investing in anything you do not understand anyway.
Overbearing returns: This is the most obvious yet easily overlooked. Rug pull projects tend to promise a drastic return on your investment in an impractical short time frame. Not to say it is impossible to have great returns in crypto investments as most notably seen with Bitcoin; however, the volatility of the crypto market makes it highly unpredictable for anyone to guarantee vast returns in a short time. In summary, if it is too good to be true, it probably isn’t true.