Over the recent years, the term “rug pull” has come up in the cryptocurrency world to define a situation where investors lose their money to crypto owners. Simply a theft, a rug pull gives its investors the feeling of overpromising, only to under-deliver. There are two primary types of rug pulls – liquidity scam and technical manipulation. A liquidity scam is all about listing the altcoin and aligning it with a decentralized exchange. Technical manipulation is all about manipulating the “approve” functionality of the ERC20 tokens. Nevertheless, rug pulls are real. If you do not want to be a victim, here are the top seven signs of rug pulls.
The number one sign for a rug pull scam is evidence of a lack of clear background information, which is usually disguised in generic interphase layouts. It is simple for the scam cryptocurrency owners to copy and publish an already existing token, rename and promote it to attract potential investors. Even as the prices begin to hike and the liquidity increases, investors cannot seem to self-assured their lucrative future. In the real sense, the scammers used the original code from the real tokens to lure unsuspecting investors.
Low liquidity is one of the significant red flags in rug pull scams. No matter how unpopular, a legitimate cryptocurrency should have at least a couple of million dollars in its core network. It simply means that the project can only be as strong as the liquidity’s height. Therefore, it is vital to investigate the actual background of the project, to understand if it has been affiliated with reputable global organizations. Most importantly, all valid crypto owners usually have a reasonable amount of tokens safely stored away indefinitely. So avoid investing if the liquidity comes off too low.
Influential Social Proof
Unlike authentic cryptocurrencies that dwell on liquidity and results in the digital world, rug pulls largely thrive on the fear of missing out and attention. As a result of giving in to the missing out fear, many rug pulls resort to having their tokens promoted by well-known organizations. However, it is worth noting that most of these organizations have no apparent ties with the rug pull company. Instead, most rug pulls rely on influential personalities to heighten the enthusiasm surrounding the token’s future and profit. Legitimate cryptocurrencies hardly promote their tokens or network, for that matter.
One of the best ways to trace legitimate crypto is the presence of a valid, updated, and reliable documentation trail. If you feel that you may be investing in a scam, you want to check the documentations’ authenticity. Here is where the value of recognized statistics comes to play. It is prudent to analyze the white paper, review its loopholes and align it with its current position. You also want to know more about the project’s type, nature, and prospects before finally investing. Additionally, find out everything there is to know about the token holders.
Evaluate the Code
It has already come out that it is easy for scammers to copy a code from a legitimate token holder and paste it into their website. So naturally, you want to be sure about the reliability of the source code used to design the token, but you are unsure of the best course of action. Many applications and software, such as token sniffer, whose core purpose is to evaluate a cryptocurrency’s code in light of its original creator, can help you authenticate the code’s validity. Such measures can help you identify whether the code for your current crypto company is as legitimate as they say.
Evaluate the Wallets
Another red flag to look out for is the nature of the wallets of each token holder. Before getting into blockchain technology, you want to ensure that you are well-versed with all the wallet’s tricks to avoid falling victim to rug pulls. For instance, if you invest in a cryptocurrency where you cannot see all token holders, that is a concern call. Also, if you see that one or more owners have more than 20 of all tokens in their wallets, you should be worried because this means that if they decide to sell their tokens, the company could go under quickly.
Total Value Locked
The total value locked is a metric used to evaluate the strength of the initial capital invested in the whole project. A legitimate cryptocurrency will have billions of dollars invested from the beginning of the project to its current state. A rug pull can qualify on all of the above six fronts of identifying a scam but will surely fail in the last if the total investment amount is in hundred thousand dollar bills, rather than billions. The higher the absolute value locked, the higher the reliability of that particular crypto company.
How to Avoid Falling Victim of a Rug Pull
Be cautious if you are a beginner in the crypto world; you want to be careful. Do not jump in too deep, especially with your first investments. It is recommended to research before investing.
• Stick to What You Know
It is no secret that new aspects have an irresistible appeal. The same goes for types of cryptocurrencies in the market today. No one wants to miss the opportunity to grab the next Bitcoin or Ethereal but be careful not to invest too blindly.
• Assess the Documentation
Many rug pulls lack the appropriate paper trail to prove their operations in the market. So if your first instinct is to evaluate the white paper, other documentation, and statistics from the external market, trust your gut and assess the documentation. The whole process is a walk in the park and not as complex as it may come off on paper.
• Review the code
It is natural for cryptocurrency owners to avail their respective codes for public scrutiny and purposes of reliability. You can spot a rug pull by comparing its code to any other existing cryptocurrency company. Applications and software primarily dedicated to this role are typical in the world today; failure to utilize their essence would be ignorance.