What Is A Rug Pull, And How To Protect Yourself From Experiencing It?

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FxBrokerReviews.org – Intelligent investors are constantly seeking businesses that seem to be headed for success and are still in the early stages. Ask the Winkelvoss twins, who made an early investment in bitcoin (BTC) and went on to become millionaires, and if you’re lucky, you might see large profits. Contrarily, “aping” into a project without performing adequate research can result in financial ruin, as was the case for people who fell for the Baller Ape Club non-fungible tokens (NFT) fraud and lost a combined $2.6 million to con artists.

This desire for investments with high risks and potential rewards is powerful in the cryptocurrency industry, where a continual stream of new ventures generates interest and attracts fresh capital. But unlike regulated financial markets, the cryptocurrency ecosystem continuously develops, and bad actors keep developing new strategies to dupe unwary investors into making poor choices.

A “rug pull” is a widespread fraud in the cryptocurrency industry when a developer or creator advertises a project like a new coin or NFT release and then vanishes with investor money. The decentralised and pseudonymous structure of blockchain enables people to participate in concealing their identity, making it challenging to identify rug pullers after the fact.

However, there are ways to spot potential rug pulls and guard against monetary loss.

What Is A Rug Pull? 

Have you ever heard the phrase “too good to be true”?

The expression “drawing the rug out from underneath” is where the term “rug pull” originates. Many of these illegal schemes are alluring and seem legitimate until the project’s creators abruptly withdraw investment monies.

Rug pulls have been noticed throughout the cryptocurrency environment in projects related to Web3, non-fungible tokens, decentralised finance, and numerous metaverse initiatives. According to Chainalysis, rug pullers stole from victims cryptocurrencies worth over $2.8 billion in 2021, making up 37% of the total earnings from cryptocurrency scams.

The possibility for huge rewards and lack of transaction intermediaries make the developing DeFi industry vulnerable to rug pull scams. These kinds of scams are also challenging to spot early on because many new cryptocurrency initiatives begin in the same way: a unique, alluring token will appear, and investors will deposit money into the project in the hopes that its value will increase.

In the NFT industry, where there is a growing demand for cryptocurrency art and a steady stream of new projects, rug pull scams are also being used. While many novice collectors are still learning the ropes, well-known initiatives like CryptoPunks have provided millions of dollars in profits for early investors.

Preventing Rug Pulls: How To Remain Safe 

Rug pull frauds might not always be apparent, but there are techniques to recognise these shady schemes and protect yourself.

1. Favour Proven Projects 

Many new ventures lack a track record that would attest to their reliability or safety. Bored Ape Yacht Club is an NFT project. Thus, some risks are involved with investing in it, but over time, the initiative has gained the community’s trust. Only some scams, but some frequently copy aspects from other well-known enterprises, indicating that the project may need more originality or long-term value for investors.

Additionally, centralised exchanges like Binance or Coinbase (COIN) have rules in place and only list safe and legal assets, even though their listings do not necessarily reflect the quality or the possibility of profit.

2. Research Initiatives And Their Creators 

Do your research before investing in a hyped-up project, despite the temptation. This advice is frequently given in the crypto community. Before determining whether to invest, it is crucial to carefully review the project, its personnel, and its blockchain capabilities.

While NFT or DeFi project founders frequently remain anonymous, doing so may shield them from accountability if the project’s launch is unsuccessful. Some creators may continue to employ a pseudonymous crypto identity for years across various initiatives and accounts. If you can identify who they are, investigate their social media profiles and other information to determine if they engage with other well-known individuals in the field and have a real following.

A positive indicator for investors is that many respectable DeFi projects would audit their smart contracts to ensure no vulnerabilities in the code. Audits can not guarantee that a project cannot be interfered with in the future, and the procedure can be costly and time-consuming.

To look out for anything that sounds fishy, it is also helpful to go through a project’s website, Discord channel, roadmap, white paper, and related resources.

3. Watch Out For Projects That Promise Large Profits 

Because DeFi scammers want cash to fund their plan, any initiative that guarantees high profits should be carefully scrutinised. Staking rewards and yield farming are two typical elements of DeFi ecosystems that con artists may try to take advantage of or manipulate.

List Of Well-Known Rug Pull Frauds 

To assist you in spotting patterns and warning signs when you conduct investing research, the following are some of the biggest rug pull frauds to date:

Onecoin: Self-described “crypto queen” Ruja Ignatova founded the cryptocurrency business OneCoin Ltd. in Bulgaria in 2014. Ignatova and her cronies allegedly made untrue statements regarding the coin and its estimated worth to attract investors.

Thodex: The exchange stopped allowing users to withdraw money in 2021, and its creator and CEO, Faruk Fatih Ozer, vanished shortly after. The night before the deal closed, users claimed that some cryptocurrencies, including dogecoin, were trading at significantly lower prices than other markets.

AnubisDAO: In its initial token sale, the project raised over $60 million in ethereum (ETH) from investors to fund its liquidity pool in return for the ANKH token. The project’s primary Twitter account was taken offline less than 24 hours into the sale, the liquidity in the collection was moved to a new address, and ANKH’s value plummeted to zero.

Frosties: The men were accused of conspiring to commit wire fraud and conspiring to commit money laundering in March 2022. They are said to have made a total of $1.1 million.

Baller Ape Club: The indictment claims that investors who attempted to buy Solana-based NFTs were misinformed that their transaction had failed. Soon after, according to allegations, Tuan and his accomplices terminated the project early and took $2.6 million in SOL from investors without ever giving them the NFTs they were promised.

Last Thoughts 

While scammers and hackers continue to attack DeFi technologies, there are measures to guard against funding shady endeavours. Law enforcement organisations and authorities continue prosecuting cryptocurrency scammers, demonstrating a broader commitment to holding scammers accountable and deterring unethical behaviour.

In the end, none of these strategies is 100% reliable. Therefore, fxbrokerreviews.org always suggest using your best judgement. To navigate the sector responsibly, be sure to secure your accounts and educate yourself about different kinds of crypto frauds.