Rug pulls are on the rise, costing cryptocurrency investors millions. Coinbase recently removed links to three different cryptocurrencies over rug pull concerns. Knowing how to identify rug pulls is a must-have skill for every crypto-enthusiast, but what is a rug pull, and how do you avoid them?
What is a Rug Pull?
Rug pulls are a cryptocurrency scam in which a token’s project team drains the project’s liquidity, leaving investors with worthless tokens. Token creators can drain project funds by pulling their liquidity or selling a significant amount of their token into their liquidity pool. Often, malicious project teams aggressively promote their token on Twitter, Telegram, Reddit, and other social media platforms to drive up their token’s price before rug pulling.
How to Identify a Rug Pull
- Is the team doxxed? – Projects with doxxed teams are significantly less likely to rug pull. Look for a “Meet the Team” page or a link to a Linkedin profile that belongs to the creator. A doxxed team doesn’t necessarily guarantee the project isn’t a rug pull, but people are less likely to steal from their investors if their identity is known.
- Look at the top holders – Does one wallet control the majority of the token supply? If so, and the funds aren’t locked with an audited smart contract, the wallet’s owner can quickly sell their tokens and drain the project’s liquidity. If the project claims that the funds in the wallet are locked until a certain date, it’s a good idea to ensure the fund-lock contract has been audited by Certik or another smart contract auditor.
- Look at Token Sniffer or another independent auditor – Numerous independent auditors research new crypto projects and share their findings. Token Sniffer scores projects based on their safety and credibility, giving investors a sense of whether or not the project team might try to scam them.
What Else Can You Do?
Make sure to research the project’s website, Medium, and Github accounts. Look for red flags like obvious misspellings, bad grammar, and continuity issues. If the project’s claims are different from site to site, the project team may not have a long-term vision. Check Reddit, Twitter, and other social media sites to see if others have identified signs of malicious intent.