Crypto Rug Pulls: How to Spot and Avoid Scams

Crypto rug pulls cause billions of dollars of losses for unsuspecting investors. Unfortunately, they’re a common occurrence in the cryptocurrency space. They involve attracting investors to a crypto project, then stealing their funds or leaving them with worthless assets.

It can be tough to know when a new crypto project is worth investing in or just a scam. This guide includes examples of rug pulls and tips for identifying them so you know what to look for.

What is a crypto rug pull?

A rug pull is a type of cryptocurrency scam where a developer promotes a new project to attract investor money and then suddenly disappears or shuts down the project and takes the investor assets with them.

“Pulling the rug out” from under someone means taking away important support suddenly or unexpectedly. In the crypto space, rug pulls have become common in decentralized finance (DeFi), non-fungible tokens (NFT), and Web3 projects.

Rug pulls tend to happen more frequently on decentralized exchanges (DEXs), which are part of the DeFi ecosystem. DEXs allow users to list new tokens for free and without security audits, making it much harder to detect scams.

Types of crypto rug pulls

Rug pulls can come in a variety of shapes and sizes. You can also have hard or soft rug pulls. Hard rug pulls involve changing the code of the project so the developer can scam investors. Soft rug pulls rely more on marketing and hype to falsely inflate the value of a project, then the founders shut it down and disappear.

• Dumping: In this scheme, developers will attract investors and encourage trading via social media or building communities on Discord and Reddit. Once the coin or NFT’s value is inflated, the developers sell their own supply as quickly as possible to tank the token’s value and leave investors with worthless assets. Dumping is considered a soft rug pull.
  
• Liquidity stealing: DeFi projects usually must have a liquidity pool of crypto tokens set up, which can be secured with smart contracts. However, developers can build loopholes into the contract that let them steal the pool. This type of scam is a hard rug pull.
  
• Limiting sell orders: In this hard rug pull scam, developers add code to their tokens that prevents investors from selling it unless the developer allows it. Eventually, the developers sell their tokens and leave investors with tokens they essentially cannot sell.
  
• Team exit: A team exit, or cryptocurrency exit scam, is a type of soft rug pull. The team that develops the project doesn’t manipulate the code, they just suddenly disappear from the project. Investors are left with no support and the token eventually collapses.

How to identify a rug pull

Since there are so many new projects in the crypto space all the time, it can be hard to know when they’re scams. Security research website Comparitech tracks crypto scams, including rug pulls. According to their research, $27 billion and counting has been lost to cryptocurrency and NFT rug pulls, as of mid-September 2024.

What’s the biggest rug pull ever?

The biggest rug pull scam to date is the OneCoin Ponzi scheme. The project’s main spokesperson, Ruja Ignatova, spent about three years promoting OneCoin, a cryptocurrency token that was supposedly going to replace Bitcoin.

In 2017, Ignatova disappeared without a trace and still hasn’t been found. It turned out that OneCoin wasn’t a cryptocurrency at all — it didn’t even have a blockchain behind it. It wasn’t traded on crypto exchanges, either. It had its own platform.

The OneCoin scheme raised $4 billion and defrauded people of billions of dollars by the time the project’s founder disappeared. It was such a big deal there’s even a BBC podcast about it called The Missing Cryptoqueen.

Other rug pull examples

OneCoin isn’t the only example of a big crypto rug pull. There have been plenty others:

• Thodex: Thodex was a Turkish cryptocurrency exchange founded in 2017. In 2021, users lost the ability to withdraw funds and Thodex’s CEO Faruk Faith Ozer disappeared. He was later arrested for fraud and founding a criminal organization. Thodex users lost over $2 billion worth of funds.
  
• AnubisDAO: AnubisDAO was a dog coin project that raised $60 million on Ethereum. Investors got ANKH tokens. Only 24 hours after the project was launched, the investment pool was emptied and the ANKH token crashed to zero.
  
• Frosties NFT: Frosties was an NFT project that advertised rewards and giveaways in exchange for investing. Hours after selling $1.1 million of Frosties, the project founders Ethan Nguyen and Andre Llacuna shut it down and left with investor funds.
  
• Squid Game Token: The Squid Game Token (SQUID) was created in 2021, with the Netflix series Squid Game as its inspiration. The token raised $3.3 million from investors, then the developers drained the liquidity pool and disappeared with the funds.

These examples are only a few of the worst to happen in the last 10 years. Rug pulls and crypto scams are launched all the time, every day even. The lesson you can take away from these big scams is to be extra careful about how you invest in crypto.

Let’s look at how you can avoid getting the rug pulled out from under you in a crypto scam.

How you can avoid a rug pull scam

There’s no sure-fire way to identify rug pulls, you just have to be cautious and do some research before investing.

Do your research

Fraud is common in the crypto world because it’s easy to stay anonymous. It can be hard to get info on the developers behind a project for this reason, but you should still do your due diligence as much as possible. This research involves:

• Reading disclosures that come with the project (if any)
• Checking the background experience of the developers
• Reviewing the project’s whitepaper (if there is one)
• Looking for info about this project on Reddit, X (Twitter), in Discord communities, or on other social media platforms
• Checking if their DeFi smart contracts have been audited

Wait it out

It can be exciting to invest in a new crypto project before everyone’s heard about it — but there’s also the potential for a scam. Instead of hopping on a new project, try investing in more established projects. Look for an established community. Don’t rely solely on this community though; OneCoin had a thriving online community and it turned out to be a scam.

You can also trade on centralized marketplaces like Binance or Coinbase, as they have standards in place to ensure assets are legal and safe.

Be skeptical

Investing in crypto requires a strong dose of skepticism. Be wary of projects that guarantee unreasonably high returns. Excessive marketing and hype from crypto influencers might be another indicator that it’s a scam. If it seems like there’s pressure to invest quickly, be cautious.

Stay safe from crypto rug pulls

The cryptocurrency world is dynamic and exciting, but it’s also rife with scams. Now that you know what rug pulls are, you can avoid getting scammed and be wiser with your investments.

Frequently Asked Questions

What is a rug pull in crypto?

A rug pull is a type of crypto scam where developers create a new token or project, attract investors, and then withdraw all funds, leaving the token worthless. It’s common in decentralized finance (DeFi) and new crypto projects.

Is crypto rug pulling illegal?

Yes, rug pulling is illegal in many jurisdictions, as it constitutes fraud. However, due to the decentralized nature of crypto, tracking and prosecuting those behind rug pulls can be challenging.

What is the biggest crypto rug pull?

One of the largest crypto rug pulls was the Squid Game Token scam in 2021, where scammers made off with approximately $3.3 million after hyping up the token, then withdrawing all liquidity and disappearing.

Can a crypto recover from a rug pull?

It’s rare for a crypto project to recover after a rug pull, as investor trust is destroyed. Some communities may attempt to revive a project, but it’s challenging without the original developers or any remaining value.

How to avoid rug pulls?

To avoid rug pulls, research the project’s developers, check for transparent coding, and look at liquidity and lock-up periods. Projects with anonymous developers, low liquidity, or no audits are higher risk for rug pulls.

How much do rug pullers make?

Rug pullers can make anywhere from thousands to millions of dollars, depending on the amount of money investors have placed in the project. Large-scale rug pulls have led to multi-million dollar losses for investors.

Can you sue for rug pulls?

In some cases, you can sue for losses from a rug pull, but legal action is complicated due to crypto’s decentralized nature. Jurisdictional issues and the anonymity of scammers often make it challenging to pursue legal recourse.