What Is a Crypto Rug Pull, and How to Avoid the Scam?

Imagine investing in a promising game only to have the organizer disappear with all your money. This is the reality of a crypto rug pull. Every year, billions of dollars are lost to these scams, leaving investors empty-handed and distrustful of the cryptocurrency market. According to Hacken, over $192 million have been lost to rug pull scams in the crypto market in 2024. The memecoin frenzy driven by Pump.fun has made Solana the blockchain with the most number of rugpulls crypto investors have suffered in 2024. Another report by Immunefi estimates that over $103 million was lost to rug pulls, frauds, and scams in the crypto market - an increase of 73% since 2023. 

 

Crypto losses in 2024 | Source: ImmuneFi

 

Understanding rug pulls is crucial to protect your investments and navigate the volatile world of crypto safely. In this article, you will learn what a crypto rug pull is, how it works, and the warning signs to watch out for. We will also explore real-world examples and provide practical tips to help you avoid falling victim to these deceptive schemes.

 

A rug pull in the crypto market is a type of scam where developers or the project team abruptly abandon a crypto project and take all the invested funds with them. Investors are left holding worthless tokens, unable to recover their money. Rug pulls typically occur in decentralized finance (DeFi) projects, where there is little to no regulation overseeing the operations.

 

How Does a Crypto Rug Pull Scam Work? 

Rug pulls usually start with the creation of a new cryptocurrency or token. Developers build hype around the project through social media, influencers, and flashy marketing campaigns. As excitement grows, more investors buy into the token, increasing its value. The developers may manipulate the project's smart contract to control the token's liquidity or impose restrictions on selling. Once a substantial amount of money has been raised, the developers drain the liquidity pool or sell off their large token holdings all at once. This sudden action causes the token’s price to crash, leaving investors with tokens that have little to no value.

 

Think of a rug pull like a vendor at a bustling marketplace who sets up an attractive stall with enticing products. Shoppers flock to the stall, eager to buy the showcased items. However, just as the crowd is about to make a purchase, the vendor quickly packs up and disappears, taking all the shoppers’ money. The once-thriving stall is left empty, and the shoppers are left with nothing but empty promises. Similarly, in a crypto rug pull, the developers lure investors with the promise of high returns and a promising project, only to vanish with the funds, leaving investors with worthless tokens.

 

Understanding the different types of rug pulls can help you recognize and avoid them. Here are the most common methods scammers use:

 

Liquidity Stealing

Developers create a new token and pair it with a popular cryptocurrency like Ethereum or BNB on a decentralized exchange (DEX). As investors buy the token, liquidity is added to the pool, increasing its value. Once enough funds are raised, the developers drain the liquidity pool. Without liquidity, the token becomes worthless, and investors can no longer sell their holdings. For example, in the Squid Game token scam, following the release of Squid Game’s Season 2 in December 2024, developers drained the liquidity pool, causing the token’s value to crash from over $3,000 to nearly zero overnight.

 

Limiting Sell Orders

Scammers write malicious code into the token’s smart contract that restricts investors from selling their tokens. While anyone can buy the token, the contract prevents users from selling it back. This traps investors’ funds within the project. When you try to sell your tokens and can’t, it’s a clear red flag that the project may be fraudulent.

 

Token Dumping

Developers hold a large reserve of tokens from the project they’ve created. After promoting the token and encouraging people to buy in, they sell off their large holdings all at once. This floods the market, causing the token’s price to plummet. Investors are left with tokens that have little to no value while the scammers profit. In the AnubisDAO case, developers sold their tokens quickly, crashing the token price to zero.

 

Hard vs. Soft Rug Pulls

• Hard Rug Pulls: These are sudden and complete exits by the developers. Investors lose all their funds within a short time. For example, Thodex disappeared with over $2 billion in investor funds almost overnight.

• Soft Rug Pulls: These occur gradually. The core team gives investors a false sense of security while slowly abandoning the project. Investors might lose their money over a longer period without an immediate crash.

1-Day Rug Pulls

1-Day rug pulls happen extremely quickly, often within 24 hours of a token’s launch. Scammers mint and hype up the token, attracting investors rapidly. Once the price peaks, they sell off their holdings, causing the token’s value to collapse almost instantly. The Squid Game token is a prime example, where the price surged to $3,100 in a week before dropping to nearly zero in seconds.

 

Spotting a rug pull before it happens can save you from significant financial loss. Here are key warning signs to watch out for:

 

Anonymous Developers

Importance of Knowing the Team: Knowing the team behind a project is crucial. Legitimate projects have transparent teams with verifiable backgrounds.

 

Red Flags

• Developers use fake or unverified identities.

• Team members have no presence or history in the crypto community.

• Lack of information about the founders or key contributors.

If you can’t find credible information about the team, proceed with caution.

 

Lack of Code Transparency

Importance of Open-Source Code: Open-source code allows the community to review and verify the project’s integrity. Third-party audits add an extra layer of security.

 

How to Verify Code Transparency

• Check if the project’s code is available on platforms like GitHub.

• Look for third-party audit reports from reputable firms.

• Ensure the code is regularly updated and maintained.

Projects without transparent code are more likely to hide malicious intent.

 

Unrealistic Promises and High Returns

Identifying Schemes: Be skeptical of projects that promise extremely high returns with minimal risk. If it sounds too good to be true, it probably is.

 

Examples:

• Projects offering triple-digit annual percentage yields (APYs).

• Guaranteed profits regardless of market conditions.

Avoid investing in projects that make lofty promises without solid backing.

 

Low Liquidity and Absence of Liquidity Locks

Understanding Liquidity Locks: Liquidity locks ensure that a specified amount of tokens is held in a smart contract for a certain period. This prevents developers from withdrawing liquidity and crashing the token’s value.

 

Why Liquidity Locks Matter

• Locked liquidity provides stability and trust.

• Without liquidity locks, developers can remove all funds at any time.

Check if the project has locked liquidity for at least three to five years. Absence of this feature is a major red flag.

 

Overhyped Marketing and Social Media Presence

Recognizing Excessive Tactics: Scammers often use aggressive marketing to create hype. This includes:

 

• Excessive posts on social media.

• Influencer endorsements without transparency.

• Flashy advertisements with little substance.

Be wary of projects that rely heavily on marketing buzz rather than solid fundamentals.

 

Analyze Token Distribution for Unusual Tokenomics

Examine how tokens are distributed and allocated. Look for:

 

• Large allocations reserved for the development team.

• Skewed distribution where a few holders own most of the tokens.

• Lack of a clear plan for token release and distribution.

Unusual tokenomics can indicate that developers plan to cash out quickly, leaving investors with devalued tokens.

 

No Clear Use Case or Utility

A legitimate cryptocurrency should have a clear purpose within its ecosystem. Ask yourself:

 

• What problem does the token solve?

• How is the token used within the project?

Projects without a well-defined use case or those existing solely for speculation are likely to be scams.

 

By staying vigilant and recognizing these warning signs, you can significantly reduce the risk of falling victim to a rug pull. Always conduct thorough research and trust your instincts when evaluating new cryptocurrency projects.

 

Learning from past scams can help you recognize and avoid future rug pulls. Here are some of the most infamous cases in the crypto world:

 

Squid Game Token

Source: X

 

In 2021, the Squid Game Token capitalized on the massive popularity of the Netflix series "Squid Game." Launched on the Binance Smart Chain, the token promised exclusive access to a play-and-earn (P2E) game inspired by the show. The hype drove the token’s value to over $3,000 per token. However, developers quickly sold off their holdings and drained the liquidity pool, causing the token’s price to plummet to nearly zero within seconds.

 

Following the release of Squid Game Season 2 on December 26, 2024, numerous tokens bearing the same name flooded the crypto markets. Blockchain security firm PeckShield warned that these tokens were fraudulent and actively circulating in the wild. One token deployed on Base had its deployer as the largest holder and dropped by 99% since its launch. Similar scam tokens emerged on the Solana network, further exploiting the show's popularity.

 

An X account mimicking the Squid Game series promoted one such token. Community members quickly warned against purchasing it, noting that the top holders all "look the same," indicating a few individuals could dump the tokens once others bought in. This pattern mirrors the initial Squid Game Token scam, where developers drained liquidity and vanished with approximately $3.3 million.

 

Impact

• Rapid Price Collapse: The token's value dropped from $3,000 to almost zero almost instantly.

• Investor Losses: Investors were left with worthless tokens as the developers vanished with approximately $3.3 million.

• Community Deception: The project’s website went offline, and social media accounts were deleted, confirming the rug pull.

• Ongoing Scams: The release of Squid Game Season 2 saw a surge in similar scam tokens, making it a recurring target for fraudsters.

When Squid Game first premiered in 2021, tokens of the same name hit the crypto market. One token skyrocketed in price, showing gains of over 45,000%. However, community members suspected it was a scam when users reported being unable to sell their coins. CoinMarketCap issued a warning, noting that the token couldn’t be sold on the decentralized exchange PancakeSwap, leading many to label it a rug pull.

 

Key Takeaways from the Squid Game Token Case

• Exploiting Popularity: Scammers leverage popular media to create trust and hype quickly.

• Massive Financial Losses: Investors can lose millions in moments due to rapid price manipulation.

• Technical Manipulation: Developers use smart contract loopholes and liquidity draining to execute rug pulls.

• Community Vigilance: Active community warnings and alerts from security firms like PeckShield are crucial in identifying and preventing scams.

• Regulatory Warnings: Incidents like these highlight the need for stronger regulatory measures to protect investors from similar future scams.

Read more: Squid Game Season 2 Spurs Surge of Scam Tokens Warns PeckShield

 

Hawk Tuah Rug Pull

Source: X

 

The Hawk Tuah rug pull involved Hailey Welch, also known as the "Hawk Tuah" girl, who launched the $HAWK token on December 4, 2024. The token surged to a market cap of approximately $490 million within fifteen minutes of launch. Shortly after, interconnected wallets began selling off large quantities of $HAWK, causing the token’s value to collapse by over 93%, wiping out all gains. Welch and her associates pocketed millions as the token's price plummeted from its peak.

 

Key Takeaways from the Hawk Tuah Case

• Rapid Gain and Loss: $HAWK token skyrocketed and then crashed within a week, illustrating the volatile nature of rug pulls.

• Massive Sell-Off: A network of wallets sold 97% of the token supply, resulting in significant financial losses for investors.

• Lack of Accountability: Welch claimed the team hadn’t sold any tokens, but evidence showed that most sellers did not originally purchase tokens, indicating a coordinated rug pull.

• Technological Manipulation: The token implemented an unclear "anti-dump" mechanism, which failed to prevent the mass sell-off by malicious actors.

• Legal and Community Impact: Although scammers were tracked, they were never caught, leaving investors with no recourse and further eroding trust in crypto projects.

OneCoin

OneCoin was one of the largest cryptocurrency Ponzi schemes ever. Founded in 2014 by Ruja Ignatova, dubbed the "Crypto Queen," OneCoin promised to revolutionize the financial world. Investors were lured with the promise of high returns and the claim that OneCoin would rival Bitcoin. However, OneCoin was never a legitimate cryptocurrency. Instead, it operated as a classic Ponzi scheme, where returns were paid from new investors' funds.

 

Key Takeaways from the OneCoin Case

• Massive Financial Losses: Investors worldwide lost over $4 billion.

• Deceptive Marketing: OneCoin used fake endorsements and misleading information to gain trust.

• Legal Repercussions: Ruja Ignatova disappeared in 2017, evading law enforcement. Her brother, Konstantin Ignatov, was later arrested and pleaded guilty to fraud and money laundering.

• Lack of Transparency: OneCoin had no real blockchain, relying instead on an SQL server to manage transactions.

Thodex

Thodex was a Turkish cryptocurrency exchange launched in 2017. In April 2021, the platform abruptly shut down, causing over $2 billion in investor funds to vanish. The founder, Faruk Fatih Özer, claimed that a cyberattack forced the closure. However, it became clear that Thodex was a fraudulent scheme. Investors were left unable to withdraw their funds, leading to widespread financial ruin.

 

Legal Actions

• Investigation and Arrests: Turkish authorities launched an investigation, arresting dozens of Thodex employees.

• International Pursuit: Interpol issued a red notice for Özer, leading to his arrest in Albania in September 2022.

• Severe Penalties: Prosecutors are seeking prison sentences totaling over 40,000 years for those involved, highlighting the gravity of the scam.

Mutant Ape Planet (MAP) NFTs

Source: X

 

Mutant Ape Planet (MAP) was an NFT collection modeled after the popular Mutant Ape Yacht Club (MAYC). The project promised exclusive rewards, raffles, and access to metaverse land. After selling all the NFTs and raising $2.9 million, the developers transferred the funds to their wallets and disappeared. Investors were left without any of the promised benefits, and the value of MAP NFTs plummeted.

 

Repercussions

• Financial Losses: Investors lost nearly $3 million.

• Legal Consequences: The developer, Aurelien Michel, was arrested and charged with fraud.

• Market Trust Erosion: The scam damaged trust in NFT projects, making investors more cautious.

Protecting yourself from rug pulls requires vigilance and smart strategies. Here’s how you can safeguard your investments:

 

Do Your Own Research (DYOR): Thoroughly Investigate a Project

1. Examine the Team: Look for team members with verified identities and relevant experience. Check their LinkedIn profiles and past projects.

2. Read the Whitepaper: Ensure it clearly explains the project’s goals, technology, and roadmap. Look for detailed information about the tokenomics and use cases.

3. Analyze the Roadmap: Assess the project’s milestones and timelines. Verify if past milestones were achieved on time.

4. Check for Transparency: Projects should openly share updates and progress. Transparent communication builds trust.

Use Reputable Exchanges for Trading Crypto

• Security Measures: Reputable exchanges implement strong security protocols to protect your funds.

• Regulatory Compliance: Established platforms adhere to regulations, reducing the risk of fraudulent projects.

• Liquidity and Stability: Trusted exchanges offer better liquidity, ensuring smoother transactions and price stability.

• Customer Support: Reliable exchanges provide robust customer support to assist you in case of issues.

Invest in Projects with Audited Smart Contracts

• Identify Vulnerabilities: Third-party smart contract audits help detect and fix security flaws in smart contracts.

• Build Trust: Audited contracts indicate a commitment to security and transparency.

How to Check if a Smart Contract is Audited and Trustworthy

• Audit Reports: Look for published audit reports from reputable firms.

• Open-Source Code: Ensure the project’s code is available for public review on platforms like GitHub.

• Contract Verification: Use tools like Etherscan to verify if the smart contract source code matches the deployed code.

• Community Feedback: Check forums and social media for feedback on the contract’s security and legitimacy.

Monitor Liquidity and Trading Volume: Tools and Techniques

• Liquidity Pools: Check if the project has a significant and locked liquidity pool.

• Trading Volume: High and consistent trading volume indicates a healthy market.

• Liquidity Lock Verification: Use block explorers to verify if liquidity is locked and for how long.

• Tools to Use:

• Platforms like CoinGecko and CoinMarketCap provide liquidity and volume data.

• Use DEX analytics tools to monitor real-time liquidity changes.

Avoid Anonymous Teams: Verify Team Credentials

• Verified Identities: Projects with identifiable team members are more trustworthy.

• Track Record: Teams with a history of successful projects are less likely to scam investors.

• Community Presence: Active and transparent engagement with the community builds credibility.

• Red Flags: Lack of information about the team or using pseudonyms can indicate potential scams.

Community Engagement to Gauge Project’s Legitimacy

• Join Official Channels: Participate in the project’s official Discord, Telegram, or Reddit communities.

• Ask Questions: Engage with the team and ask about the project’s goals, progress, and future plans.

• Monitor Community Sentiment: Observe how the community responds to updates and announcements.

• Look for Transparency: Legitimate projects maintain open and honest communication with their communities.

• Red Flags: If the community is inactive or dominated by suspiciously positive comments, it might indicate a scam.

Active community engagement helps you stay informed and assess the project’s credibility based on real user experiences and feedback.

 

Additional Tips

• Diversify Investments: Spread your investments across different projects to minimize risk.

• Only Invest What You Can Afford to Lose: Cryptocurrency is volatile. Ensure that potential losses won’t impact your financial stability.

• Stay Informed About the Latest Scams and Trends: Follow reputable crypto news sources and join community discussions to stay updated on emerging threats.

By implementing these strategies, you can significantly reduce the risk of falling victim to rug pulls and make more informed investment decisions.

 

You’ve learned what a crypto rug pull is and how it can devastate your investments. We explored the common types of rug pulls, including liquidity stealing, limiting sell orders, token dumping, hard and soft rug pulls, and the rapid 1-day rug pulls. Recognizing warning signs like anonymous developers, lack of code transparency, unrealistic promises, low liquidity, overhyped marketing, unusual tokenomics, and no clear use case can help you spot potential scams. Additionally, we covered strategies to avoid rug pulls, such as conducting thorough research, using reputable exchanges, investing in audited smart contracts, monitoring liquidity and trading volume, avoiding anonymous teams, and watching for unverified contracts. Implementing safeguards like creating a secure wallet, using security tools, and engaging with project communities further enhances your protection.

 

Stay vigilant and informed. The cryptocurrency market is full of opportunities, but it also harbors risks like rug pulls. Always prioritize security, conduct thorough research, and trust your instincts. If something feels off, it probably is. Don’t let the promise of high returns blind you to potential red flags.

 

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