There are different types of scams and schemes in cryptocurrency, some of them are much more obvious than others. One type of scam that has surfaced recently is a “rug pull,” in which countless amounts of money were lost to scammers by vulnerable investors. There are several ways to ensure that a promising-looking cryptocurrency is legitimate.

What is a carpet pull?

Investing in cryptocurrency comes with warnings of volatility, skepticism, and scams. Because of how they work, decentralized projects are developed, operated and controlled by the community. Anyone with development knowledge and blockchain know-how can create a project. And the decentralized nature of digital assets in the cryptocurrency market means developers aren’t limited to the same type of regulation in the centralized or regulated realm that other companies and organizations are required to list. The lack of restrictions and the difficulty of finding a way to regulate an inherently uncontrollable space means there is no legal or financial safety blanket that can separate the bad from the good and protect investors’ money from scam projects.

A rug pull is a project used by scammers to generate hype and then exit the project, taking investors’ money with them. It relies on those looking to make a quick buck to invest in the project because of the potential profit at stake.

For example, a scammer could build a promising-looking project with what appears to be a real use case and start marketing the project’s potential. As more people invest in the project and buy the cryptos, the price of the token increases and encourages other investors to buy the token. When the project hits an exciting number, it can plateau and then suddenly appreciate in value quickly and significantly. Investors have had the rug pulled away and are wondering where the promising project has gone and why the value has fallen so quickly.

How to avoid losing your money on a crypto rug pull

However, cryptocurrency is an exciting industry to invest in and get involved in! There are reasons to be mindful of what projects you invest in, but that doesn’t mean it’s not worth investing in or exploring the ever-evolving space. There are a few ways to keep an eye out for rug pulls and other scams and enjoy the cryptocurrency space without becoming a victim.

Focus on the function, not the hype

A cryptocurrency being touted as something worth buying because of the hype surrounding it needs a better reason to be supported. If a project has no legitimate function other than making a quick buck, you’ll see a red flag.

For example, after the Netflix series Squid Games made media and social media headlines for weeks, a seemingly relevant cryptocurrency emerged. Squid Coin, or SQUID, made money and fast, but the only value it purported to serve was making investors money while riding the Squid Games hype. The token is not officially associated with the series at all, and Binance has blacklisted the token.

Increasing value without a reason is not a good thing

When a new project has appeared out of nowhere with no background whatsoever with rising values ​​and massive trading volume, pay attention to why. If there is no possible reason (e.g. a major platform or exchange listing the token, a prominent investment, or a recent upgrade), this does not bode well for the token’s legitimacy. Rather than fall for FOMO, be skeptical about new projects, especially if they don’t have a well-known team behind them.

Do your own research

It’s been said before in cryptocurrency, and this won’t be the last: when buying cryptocurrency, do your own research. Look at things like the founders of the project. If they come from a shady background, the signs don’t look good that they are in cryptocurrency to be the good guy. If you can’t find information about the project, how long it was in development, what the functional utility is, and what others have to say about it, proceed with extreme caution.

Also, don’t be afraid to ask questions. Most small projects tend to have a founder or team member that you can collaborate with in some way. Reach out to a project team member on Twitter and check their response to any questions you might have about the project’s functioning and future.

Check whether the project has liquidity

The cash in a project – and funds tied up – provide a telling story about a project’s legitimacy. Real projects have lots of money in liquidity and offer investors or traders an opportunity to use their coins to fund the project (aka staking). If there are longer staking periods where tokens cannot be taken out, this is a better sign. This is because the project’s founding team will be looking at the future of the token and not a quick pump-and-dump program where it can quickly retire. Smart contracts keep tokens locked in the project once they have been staked and nobody, including the founder, can withdraw them.

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