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The cryptocurrency industry has grown significantly in the last five years and we have seen a lot of things evolve in this space. One of the major advancements in the crypto industry is ease of entry. The decentralized finance ecosystem allows anybody to create a cryptocurrency and list it on decentralized exchanges. Most of these altcoins have no inherent value and they are mostly created with the hope that the crypto public will accept their project. While this can be a good thing, it can also be a bad thing because when people buy these seemingly valueless coins, there is no infrastructure to guarantee the safety of the money. This can easily allow the creators of the cryptocurrency to close down the platform and abscond with the entire liquidity. This move is known as a rug pull, and in this article, we take a detailed look at rug pull and how to avoid it.
What is a rug pull?
A rug pull is a cybercrime in the cryptocurrency space where the developers of a project abandon the project and run away with investors’ funds. This maneuver is mostly common with decentralized exchanges because they are no strict regulations to keep criminal crypto developers in check. They can easily create a cryptocurrency and list against a major coin like Ethereum. Once enough unsuspecting investors have bought swapped Ethereum (or any other leading cryptocurrency) for their coin, they withdraw all the investor funds and drive the price of the coin down to zero.
Rug pulls are usually well planned and organized. Initially, they create a buzz around social media to get the crypto community talking. When they have enough attention, they scale by investing huge amounts of money in the project. This will drive the price of the cryptocurrency up and foster investor confidence. When enough people have put their funds into the project, they withdraw all the investor funds and drive the price down to zero.
How to avoid a rug pull
Liquidity
The easiest way to recognize a token that might eventually get the rug pulled is to check their total liquidity pool. DEXs will determine the price of a token in a liquidity pool against the available balances. Real tokens with solid project targets will have tens of millions of total liquidity. They will also have money and other tokens locked away for future use. It is far more likely for a cryptocurrency with a limited liquidity pool to be rug pulled.
Stay calm during FOMO season
Fear of missing out is one of the ways fraudulent investors set up a project to be rug pulled. They purchase massive amounts of their coin and drive the price up. Most people monitoring the market will see this significant opportunity for profit and quickly jump in on the trade. When the price of the token hits the peak target, the investors will close up the project and withdraw all funds.
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