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Crypto Rug Pull Meaning and Ways to Avoid It

The crypto industry is emerging. It brings advanced opportunities for investors and regular users. While investing in cryptocurrency offers higher returns over other trading types of assets, traders should know how to avoid a crypto rug pull - a new type of scam associated with the cryptocurrency sector.

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A crypto rug pull can result in tremendous consequences for not only investors but the entire industry as well. In this article, we are going to learn more about the process of rugging crypto as well as how traders can avoid that rug pull.

Crypto Rug Pull Meaning

First of all, we need to clarify what a rug pull is and how it works. It is a new type of crypto scam. The name is associated with the expression “to pull the rug out”. The concept is quite simple:

  1. A developer establishes a new crypto or cryptocurrency project.
  2. A developer tries to attract as many investors as possible.
  3. A developer abandons all investors leaving them with a coin that costs nothing when the project comes to an end.
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Rug pulls are becoming a bigger threat today. Scam developers have already disrupted not only the insurance and banking industry but also NFT projects. The best way to protect your assets and capital is to invest in the most proven and trustworthy coins. Additionally, investors are supposed to trade on reliable and time-tested marketplaces avoiding scam exchanges and websites.

Major Types of Crypto Rug Pulls

Now, let’s have a look at major ways how rugging crypto can be classified. Knowing the rug pull types will let you easily identify them despite the crypto sector. So, all rug pulls can be divided into the following types:

  • Sell orders limiting. This type represents self-coded tokens that only developers can sell. They wait for traders to invest their paired currencies and then dump the project along with their positions leaving traders with coins that are worth nothing.
  • Stealing liquidity. A developer extracts all of his or her coins from the liquidity pool. This particular rug pull can terminate all the value created by investors, while the price goes to zero.
  • Dumping. A situation when investors sell a huge number of tokens right at once is called dumping. It leads to asset price reduction while investors are left with worthless coins once again.

Now when you know the main types of crypto rug pulls, you will have better chances to identify and avoid them.

Ways to identify Rugging Coins

A type of crypto rug pull defines the method to identify it. Investors should establish in-depth project research. The idea is to generate as much information as possible about the asset developers and founders, analyze the team behind the project, etc. The investigation is the key to success.

Another step is to check if the coins’ liquidity is locked or if there are selling limitations. Make sure a developer is able to provide a steady token supply in case of a liquidity decrease. Once you have spotted a drastic price swing, it may also mean the project is a scam featuring tokens that do not have enough liquidity.

New crypto should come with an external audit maintained by third parties. If it doesn’t, it can also be a sign of the crypto rug pull. Last but not least, try to stay cool and avoid FOMO whatever happens. The majority of fraud developers use the effect of fear to miss out as the main tool to attract as many potential investors as possible.

Baseline Steps to Avoid Crypto Rug Pulls

Summing up all the above-mentioned, it is not that hard to avoid crypto rug pulls. All you have to do is to follow these simple steps and precautions:

  1. Always review the audit and investigate the new project.
  2. Invest in trusted coins and use only reliable marketplaces.
  3. Try to find out as much information about the developing company as possible. It may not even exist.
  4. Explore the management structure and the team behind the project.
  5. Do not jump for the first project with suspiciously high coin prices.

The Bottom Line

Crypto trading delivers great opportunities for investors offering higher returns compared to traditional trading. What’s more, traders can act without limitations, as digital currency delivers more trading freedom than ever before.

On the other hand, the risk of fraud is also high. Developers create scam projects also known as crypto rug pulls. They try to attract as much capital as possible, eventually leaving investors with worthless assets. So, you need to be very careful when selecting a project to invest in.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.