Investing in cryptocurrency seems to be the hottest trend since Bitcoin blew up. Finding the next thing that would blow up the same way Bitcoin did and becoming an instant millionaire doesn’t sound too farfetched.
With more than 10,000 other cryptocurrencies available, discovering the next coin that would turn the table for you, leading you to a prosperous life isn’t going to be that easy.
What Exactly is a Rug Pull?
Imagine hearing about a coin that is said to become the next Bitcoin, and you being afraid of missing out, try to buy in, hoping to get a piece of that profit and multiply your money.
You saw that the market value of that coin goes up to ten times its price when you bought in. Then you thought to yourself that this could be your golden opportunity.
Unfortunately, you became a victim of an infamous rug pull. A rug pull is when the developer or a whale runs away with all the funds for themselves, leaving investors behind with no other way to get their money back.
How Does a Rug Pull Happen?
This will get a bit confusing since this topic is complicated, but I’ll explain it in simple terms. There are three ways for a rug pull to happen. It can be done by either the developer of the coin or a whale. A whale simply refers to an entity or an individual who holds a huge portion of the fund. They have enough influence to affect or manipulate its price for their gain.
- Liquidity yanking – For a token to be traded, developers add a valuable token like Ethereum for example, so traders could buy, sell, and trade ETH with their newly minted tokens. As time goes by, the newly minted tokens will attract more investors, causing their market cap to go up in value. The developers can then yank out the initial liquidity pool, taking the profit for themselves and disabling investors to perform a trade since there won’t be enough liquidity for it.
- Selling shares – Newly minted tokens start from humble beginnings, costing only a few cents each, depending on the available supply and the hype surrounding it. Once the price of the token is high enough, developers and whales can just sell the share that they got for themselves during the early stage of the launch, making the price for that token to crash, and leaving everyone else in the dust.
- Inability to sell – This one is simple, the blockchain can be programmed to allow investors to buy in, and at the same time disable them to sell out. The developers can give an exception for themselves, so when the price is high enough, they can then sell their share, earn thousands or even millions, and just disappear.
How to Avoid a Rug Pull?
Most trusted tokens lock up their liquidity pool for centuries to give assurance to investors that they won’t be able to pull it out, even if they wanted to. Others only do so for a couple of months but keep in mind that there are still other ways to manipulate its price.
Aside from that, you can also check if there are a few wallets that hold a huge percentage of the token using blockchain explorers like ETHERSCAN and BscScan to watch out for whales. Another thing to look out for is if the coins have a huge percentage of burned tokens. Burned tokens mean that they send a portion of the tokens to some unknown address to cut the supply; This is commonly done to increase the value of each remaining coin.
Let’s say that 95% of the total tokens were burned, looking up wallets that hold a huge portion of the token supply would be tricky. In the blockchain browser, a whale wallet will only show you 1% or even 0.5% of the total coins they hold. But in reality, that’s a total of 20% or 10% from the remaining total of 5% supply.
Another thing to look out for is if they don’t have audits from trusted third parties and if they don’t have a dedicated website for their token. It takes time, effort, and legitimacy to set these up. If a token doesn’t have one, it’s probably a scam designed to rug pull unsuspecting investors.
The crypto industry is still in its early stage and there isn’t a proper regulation or law to protect investors.
Developers can remain anonymous, so it is hard to catch them whenever an event like this was to happen. Even Influential celebrities that can manipulate the market with a single tweet cannot be held responsible. There’s just no law that exists for it yet, so it’s up to us to investigate.
Be cautious to avoid being a victim of such unfortunate events.