How To Avoid A Crypto Rug Pull?

Highlights 

• If you research some of the top cryptos by market capitalisation, you’ll notice that they have one thing in common: a research and development team
• In addition to a sophisticated and fully functioning website, legit tokens have a presence on Twitter and Reddit and a community that can vouch for the token’s authenticity
• Legitimate cryptocurrencies will usually receive independent security audits or financial transparency reports that confirm their authenticity

The Crypto space is still the Wild West. There are now over fourteen thousand cryptocurrencies in circulation, with many of them established. The most well known of these is Bitcoin, which has earned the trust of investors since its inception in 2009.

However, there exist tokens that were developed and launched specifically to swindle unsuspecting investors out of their money, promising high returns only to run off with their investor’s money.

This is what’s known as a ‘rug pull’ and is, unfortunately, a regular occurrence in the market. Additionally, due to the lack of any regulation or legislation governing crypto exchanges, duped investors have little to no recourse.

The best type of recourse, however, is preventing a rug pull from happening in the first place.

So, let’s dive into exactly what a rug pull crypto looks like and how to prevent your hard earned dollars from falling into one.

What's a rug pull Crypto?

A rug pull crypto often promises high returns, incentivising investors to hold onto the coin. In other cases, the coin will have something built into the code preventing investors from selling. Then once the liquidity pool reaches a certain amount, the dodgy developer will take off with all the accumulated money, leaving duped investors out of pocket.

Lack of Research and Development

If you research some of the top cryptos by market capitalisation, you’ll notice that they have one thing in common: a research and development team.

If you peruse Cardano’s official website, you’ll discover that this crypto was launched in 2017, but its development started two years ago. Not only that but the founder of Cardano, Charles Hoskinson, had previously co-founded another respected crypto – Ethereum.

Crooked cryptos, on the other hand, are not carefully put together. On the contrary, they are hastily and shabbily put together, and the developers' names are usually not available.

Image Source © Elnur | Megapixl.com

Poorly Designed Website

Another common feature of a scam coin is a website that looks like it was hastily put together.

A recent example of this was the highly publicised Squid Game Token, which popped up overnight without announcement (another sign of a scam coin). One of the red flags that more savvy investors spotted immediately was the poor spelling and grammar used in the coin’s whitepaper (a whitepaper is a document laying out the project and the project’s technology).

To add to this, the whitepaper was very short – only a couple of pages long. Compare this to, say, Ethereum, whose whitepaper is 36 pages long and you can see this is another red flag.

A Lack of Social Media Presence or Online Community

Reliable tokens have a solid online presence. In addition to a sophisticated and fully functioning website, they have a presence on Twitter and Reddit and a community that can vouch for the token’s authenticity.

In some cases, a scam coin may have social media accounts, but a deeper dive into the posting history and the post’s comments usually reveal a poorly integrated community, which is not a sign of a legit project.

No Audits

Legitimate cryptocurrencies will usually receive independent security audits or financial transparency reports that confirm their authenticity.

For example, Cardano (ADA) has undergone multiple audits and an independent source code audit to fortify its security.

If a coin hasn’t achieved a source code audit, it doesn’t necessarily mean that it’s dodgy, but it is a sign that you should do some further investigative research.

Rug Pull Crypto Checkers or Online Scam Detectors

If you go through your research and you’re still undecided as to a coin’s legitimacy, there are also online tools that can help you identify a potential rug pull. For example, Token Sniffer lists all the latest scam coins and analyses a coin’s smart contracts and gives a risk warning pertaining to that coin.

Rug Doctor is another useful online resource, which analyses the code of crypto projects and then lists any coin it deems problematic on its website, adding a risk score and breaking down the red flags found in the project.

The Verdict

Until the crypto space receives legislation surrounding the fair trading and consumption of crypto and crypto-related products, investors have no recourse if they happen to get fleeced by a crypto rug pull. This is all the reason for investors to do their due diligence and research projects before sinking money into them. Because, like anything, prevention is better than cure.