Crypto scams are always there, but how do you avoid one?
Cryptocurrency captured world attention during the pandemic, and scammers have noticed it too. With the rising crypto popularity of altcoins and meme coins, there is an increasing upsurge of new scams taking place all over.
You may have heard or read recently of big names such as Jordan Belfort and Donald Trump claiming cryptocurrency to be a huge scam, with no use and no value.
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What Is A Scam?
A scam is a deceptive scheme or trick used to cheat someone out of something.
But a rug pull – this is the next level. Rug pull is a malicious maneuver in the crypto industry where crypto developers abandon a project and run away with investors funds. They’re everywhere, on Telegram groups, Instagram pages, fake communities on Facebook – you name it.
This happens when developers create a token paired with a valuable cryptocurrency and list the token on a decentralised exchanges (DEXs), then pull the funds. In an easier way, the developers cash out the investors capital once they gain enough traction.
You may have read or heard a few, with a most recent one being the Squid Token based on the Netflix hit-series Squid Game, or even the One Coin scam in 2016 conned the biggest crypto con in the world. You can listen to The Missing Cryptoqueen podcast on BBC Sounds.
How To Find A Rug Pull?
They usually occur by seasoned scammers but they can be easy to spot if you pay close attention to the signs:
Low Liquidity means its difficult to convert tokens into money as the developer of the tokens have limited funs to create them. It is easier for the developers to manipulate and inflate the tokens prices in a low liquidity environment. The best way to look at the liqudity of the token is to look at their 24hr trading volume which should be at least 20-40% of the coins total market cap.
Low Total Value Locked
Total Value Locked (TVL) is the total amount invested into a single project and it is a reliabe metric to check the authenticity of the project. A legitimate project will like have a few million or billions invested, while a scam will have a few hundred or thousand invested.
How To Avoid A Rug Pull?
Every project should have a document called a whitepaper which provides potential investors with information like the concept, purpose and sometimes the technoloy used. A well-drafted document provides legitimacy and professional outlook to the project. A poorly written or copied whitepaper is a definite red flag!
Follow Social Channels
A scam usually contains a low-traffic website and channels which were created very recently, with fake followers. You can see this by the first post date and how many followers they have, or by how much the website has been updated. A legitimate project will provide regular updates, have an active presence, investor outreach and a community engagement on platforms such as Twitter, Telegram, Instagram, Discord and others.
Use Online Tools
There are various online tools that can detect a rug pull scam like Token Sniffer and RugDoc. For a higher level scam detection, Etherscan or Binance Smart Chain explorer can evaluate the legitimacy of the project. It is always better to make your own analysis to have a human judgement.
With the crypto industry ever growing, it gathers more and more attention and rug pulls become more prevalent and to some extent within NFTs too. Most of these scams are well planned, marketed intensively and executed brilliantly.
By following some of the tips above, you can decrease the chance you will be pulled by a rug puller. Be an intelligent investor!