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There are different kinds of scams and schemes in cryptocurrency, some of them are much more obvious than others. One type of scam that has emerged recently is a “rug pull” and its seen countless amounts of vulnerable investor’s money lost to scammers. There are a couple of ways to make sure a cryptocurrency that looks promising is legitimate.
What is a rug pull?
Investing in cryptocurrency comes with warnings of volatility, scepticism, and scams. Because of how they work, decentralised projects are developed and run and controlled by the community. Anyone with the development knowledge and blockchain-know how can create a project. And the decentralised nature of digital assets in the cryptocurrency market means that developers are not limited to the same sort of regulation in the centralised, or governed, scope other companies and organisations are to be listed. The lack of restriction, and the difficulty in finding a way to regulate an inherently uncontrollable space, means that there is no legal or financial safety blanket that can weed out the bad from the good and look after investor’s money from scam projects.
A rug pull is a project that scammers use to create a hype, and then exit the project, taking investors money with them. It relies on those wanting to make quick money investing in the project because there’s a buzz around the possible profit.
For example, a scammer might build a promising looking project with seemingly a genuine use-case and start marketing the project’s potential. As more people invest in the project and buy the crypto, the price of the token starts rising, encouraging other investors to buy the token. When the project hits an exciting number, it might come to a plateau and then suddenly in value, quickly and significantly. The rug has been pulled out from under investors and they are left wondering where the promising project went and why the value tanked so quickly.
How to avoid losing your money to a crypto rug pull
Cryptocurrency is an exciting industry to invest and get involved in, though! There are reasons to take care in what projects you invest in, but that doesn’t mean it’s not worthwhile investing or exploring the ever-emerging space. There are a couple of ways to look out for rug pulls and other scams and enjoy the cryptocurrency space without falling prey.
Focus on function, not hype
A cryptocurrency that is touted as something worth buying because there’s hype around it needs better reason to be backed. If a project has no other legitimate function other than being a way to make quick money, you’re looking at a red flag.
For example, after the Netflix series Squid Games made headlines across media and social platforms for weeks, a seemingly relevant cryptocurrency popped up. Squid Coin, or SQUID, was making money and quickly, but the only value it was claiming to serve was to make investors money, while riding the Squid Games hype. The token is not associated officially with the series at all, and Binance has blacklisted the token.
Surging value without reason is not a good thing
If a new project without any sort of background has come out of nowhere with soaring values and a massive trading volume, take care to look at why. If there’s no possible reason (for example, a big platform or exchange listing the token, a celebrity investment, or a new upgrade), it’s not a good sign for the legitimacy of the token. Rather than falling to the FOMO, keep a skeptical eye on 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 time: When buying a cryptocurrency, do your own research. Look at things like the project’s founders. If they have a background in anything shady, the signs aren’t looking good that they’re in cryptocurrency to be the good guy. If you can’t find any information on the project, how long it’s been in development, what the functional use is, and what others have to say about it, proceed with a massive amount of caution.
Also don’t be afraid to ask questions. Most small projects will generally have a founder or team member who you will be able to engage with in some ways. Approach a team member of the project on Twitter and gauge their response to any questions about the project’s function and future you might pose to them.
Look at whether the project has any sort of liquidity
The liquid assets in a project – and funds locked up – offer a telling story about the legitimacy of a project. Genuine projects have a lot of money in liquidity, and have opportunities for investors or traders to use their coins to help fund the project (also known as staking). If there are lengthy staking periods, where tokens can’t be taken out, it’s a better sign. This is because the project’s founding team will be looking at the future of the token, rather than a quick pump-and-dump scheme where they can quickly withdraw. Smart contracts will keep tokens locked into the project if they have been staked, and no-one, including the founder, will be able to withdraw them.