In this article, we'll be diving into the topic of crypto rug pulls. If you’ve been trading in the crypto space, you may have seen situations where a coin’s price plummets by 80-90% within just 24 hours. But why does this happen, and how does it unfold? I’ll be breaking down exactly how rug pulls work, what to watch out for, and most importantly, how you can protect your investments to keep them safe and secure.
What are Crypto Rug Pulls?
Alright, so let’s talk about crypto rug pulls. If you’ve been in the crypto game for a while, you might’ve seen this happen: the price of your coin suddenly drops by 80% or even more within a few hours or maybe a few days. It really depends on the type of coin you’re dealing with and how many people are holding it. Now, why does this happen? There are actually two main ways this goes down:
Price Crash Rug Pull: This is where the price of your crypto coin nosedives, like seriously plummets, in a matter of hours or days. It could be because the developers or some big holders decide to dump all their coins at once, causing the price to tank. The amount of time it takes and how fast it drops depends on the coin and how many people are involved. When this happens, you’re stuck holding coins that have lost almost all their value, and it’s almost impossible to get your money back.
Liquidity Rug Pull: The second type is when the coin’s price might not even move much, but suddenly, there are no buyers left in the market. This is a major problem because it means you’re stuck with coins that you can’t sell. Basically, you’re holding onto something you can't convert into real money. This happens when there’s a lack of liquidity, like when the developers pull their liquidity pools, so even if you want to sell, there’s nobody buying.
In both cases, you’re left in a situation where you can’t sell your coins and convert them into fiat currency. Understanding how these rug pulls work is important so that you know what to look for and how to avoid falling into these traps.
Crypto Rug Pull Techniques You Should Know
If you’re in the crypto space, you need to be aware of a few common techniques used for rug pulls. These tricks are how scammers manage to drain the value of a coin, leaving investors with nothing. Let’s break them down:
Mintable Coins: One of the oldest tricks in the book is mintable coins. This is when developers create more coins whenever they want, effectively reducing the value of the coins you’re holding. It’s similar to what happens with fiat currency—if a country starts printing more money, the currency value drops. In crypto, when developers mint extra coins, they flood the market, and the price of your coin takes a nosedive. Always check if a coin has a minting feature before you invest.
Concentration of Cryptocurrency in a Few Wallets: This is a major red flag. If most of a cryptocurrency’s supply is held in just a few wallets, they can control the price at any time. A recent example of this was with the Hamster Token. After it was launched on the launchpool, when the price went up, the top wallets started selling, causing the price to drop by almost 40% within an hour. Even now, five wallets hold over 90% of all Hamster Tokens. When the majority of a coin’s supply is in the hands of a few, they control the game. This is a setup for manipulation, and it’s something you should always be wary of.
High-Yield Promises: Another rug pull technique is when a cryptocurrency offers ridiculously high yields or interest rates for staking or providing liquidity. While it might sound tempting, it’s a massive red flag. Legitimate cryptocurrencies, especially the stable ones, don’t offer these absurd returns because they focus on building sustainable ecosystems. If a project is promising you unusually high returns, be cautious—chances are, it’s a trap.
Lack of External Audits: Lastly, when a cryptocurrency doesn’t have external audits, you need to be on alert. Many scam projects only list on small, lesser-known decentralized exchanges that don’t have strict checks. Bigger exchanges tend to audit projects thoroughly, ensuring they have a solid use case and proof of work. If you’re looking into a coin that hasn’t been audited or is only available on small, unverified platforms, proceed with caution. It could be another rug pull waiting to happen.
Lock on Limit Orders: This is when developers impose restrictions on how much you can sell and at what price. So, even if you want to sell your coins, you’re only allowed to sell a small percentage, like 5% or 10%, of your total holdings. To make matters worse, you may not even be able to sell at the price you want. The market in this case isn’t free, and you’re stuck selling at the price they set, which is usually much lower than expected. This is a clear manipulation tactic, as it limits your ability to exit the market when you need to, trapping you with devalued coins.
How to Stay Aware of Crypto Rug Pulls?
Fortunately, there are ways to protect yourself from crypto rug pulls. Tools like Rugcheck or Birdeye can help you verify the security of a token before you invest. These tools allow you to check whether the token has a solid market share and a substantial audience backing it. They also help ensure the coin isn’t concentrated in just a few wallets and that it’s available for buying and selling without restrictions. You’ll be able to verify if there are any limits on transactions or sell orders, so you know if the market is truly open. Using these tools, you can make more informed decisions and avoid falling into rug pull traps.
How to Check the Authenticity of a Coin when Investing?
Verify the Coin's Authenticity
Another reminder to avoid getting rug pulled during your crypto investments is to make sure you know the authenticity of the coin. There are many free ways to check this.
Check if the Coin is Listed on Major Exchanges
Start by checking if the coin is listed on popular cryptocurrency exchanges. If the coin is already available there, you can find data that shows whether the coin’s control has been renounced by the developer or the owner. This is an important step to ensure that the coin is not being manipulated.
Examine the Coin’s Market Share
Next, make sure to check the total market share of the coin and how many wallets are currently holding the cryptocurrency. If a small number of wallets hold most of the supply, this is a significant red flag.
Monitor Price Fluctuations
You also need to keep an eye on the price fluctuations of the coin. If there is a small market share but the price is exploding after a few intervals (like days or months), that’s another warning sign. This indicates that the price isn’t being defined by the audience or the market, suggesting clear market manipulation.
Look for External Audits
Finally, consider the importance of external audits. These audits are done by decentralized exchanges or third-party services to ensure that the promises the coin is making are actually true. If a project lacks these audits, it’s a significant risk factor.
Bottomline
In the end, crypto is highly volatile and not all cryptocurrencies are safe. Investors investing in cryptocurrencies need to do their own research and checks to ensure that their investments are secure and that they are not falling victim to any rug pulls or scams perpetrated by different developers in the cryptocurrency world. It is always better to avoid projects that have unclear documentation, vague targets or explanations, or those that promise excessively high returns because if something is too good to be true, it probably is.
