What Is a Rug Pull?
A rug pull is a type of cryptocurrency scam in which the team behind a crypto project suddenly abandons the project and disappears with investors' money. The term is coined from the idiomatic expression "to pull the rug from underneath" and is often used to describe situations where developers defraud investors of their money.
Popular Crypto Rug Pulls
Several rug pull cases in the cryptocurrency and NFT space have made the headlines in recent years, and here are some of the most popular ones.
Squid Game (SQUID) Token
The SQUID token leveraged the popularity of Netflix's show Squid Game to attract investors, causing its value to skyrocket to a peak of $2,861 less than a month after launch. Shortly after reaching this high, SQUID’s value plummeted to almost zero, leaving investors with worthless tokens. According to various reports, the developers had drained the liquidity pool, disappearing with over $3.3 million in investors’ funds.
Thodex
Thodex was one of Turkey's largest cryptocurrency exchanges, founded by Faruk Fatih Ozer. Established in 2017, the platform attracted over 400,000 users by offering appealing promotions, including token giveaways. In 2021, Thodex stopped exchange withdrawals after CEO Ozer disappeared with $2.7 billion in customers’ assets. Ozer was convicted and sentenced to 11,196 years in prison for aggravated fraud in 2023.
OneCoin
OneCoin, a now-defunct cryptocurrency project, was founded by Ruja Ignatova in 2014. Ignatova introduced OneCoin as a pyramid scheme, promising high returns and using a multi-level marketing (MLM) structure to attract investors globally. Investors lost over $4 billion to this project and is regarded as one of the largest crypto rug pulls in history.
How to Identify Rug Pulls
Identifying a rug pull can be tricky, but there are several red flags to look out for when investing in a crypto project.
One key indicator of a potential rug pull is the absence of a liquidity lock. If a project doesn’t lock its liquidity, developers can easily drain funds, leaving investors with worthless tokens. Meanwhile, an anonymous or unverified project team should raise concerns about credibility.
Another major red flag is an absence of smart contract audits or transparency. Reputable projects typically undergo third-party audits to ensure security and integrity. So, if a project refuses to release an audit, there may be hidden malicious intent or technical flaws.
You should also review the project's tokenomics; be wary of developers holding a significant portion of the token supply, as they could easily sell off their tokens and crash the price.
Furthermore, one of the hallmarks of crypto rug pulls is a sudden price surge, where a token’s value skyrockets within a short period. This is often part of a pump-and-dump scheme to lure in investors before developers cash out. By staying cautious and thoroughly researching any project, users can mitigate the risk of falling victim to a rug pull.
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