There was a particular cryptocurrency token that went from 0.01 per token all the way to $4.42, then all the way to $2,861 per token in a matter of a few hours, and then it all came just crashing down. It actually fell down to $0.07 in the matter just of a few minutes or a loss or decrease of 99.99%. If you had any money in this token you would have been a victim of what’s called a “rug pull” in the crypto world, it’s just one of the many types of scams that are out there.
Crypto Wild West
Right now, we’re still pretty much in the wild west of crypto, a lot of scams and fraud still happen in the de-fi space. In the case of the squid game token, a lot of unsuspecting investors were not able to pull their money out due to what’s called an anti-dumping mechanism that was imposed by the project’s developers. Meaning that investors could not sell this token.
That would really suck if you actually bought this squid game token, and you would have found out through a telegram or a discord message that actually said the following it said that someone is trying to hack the project these days and that they’re not going to continue running the project as they are depressed from the scammers and are overwhelmed with the stress.
But then, nobody ever heard from them and all the money was gone, therefore it was a rug pull. Today, we’re going to talk all about scams in the crypto world, how you can actually identify what a rug pull looks like, and other types of scams and how you can prevent them. By knowing this information, hopefully, you’re going to save a ton of money and heartache down the road.
What is a Rug Pull?
Let’s actually put yourself in the shoes of a scammer first. Let’s actually pretend you’re starting a scam token, you can create an infinite amount of tokens but you actually need new investors to trade that token. To do that, you’re going to put your scam token and another type of cryptocurrency such as Ether into a liquidity pool.
The pool basically lets new investors come in and trade their existing Ether for the new token. As more and more investors pile into your token because of hype marketing speculation, FOMO, whatever you want to call it, that’s when you the scammer can decide to pull everything out of the pool including all the Ethereum investors who have been trading in your pool for your tokens.
Basically once enough people have bought the coin, the scammer runs off with the money and leaves you with the worthless token. It’s called the rug pull because pretend you’re just standing on a carpet minding your own business, but then someone that really sucks comes along and pulls a rug out from under your feet. That feeling definitely sucks, you probably fall, you’ve lost your support, and the same thing can actually happen in the cryptocurrency world.
How To Protect Yourself
When a rug pull occurs, the support is completely lost, and therefore the price drops to basically zero, that’s exactly what happened with the squid game token. The question becomes how do you protect yourself?
There are so many red flags that we should be looking for whenever a new crypto project is launched, and that’s actually what I want to share with you. I am certain that if you’re aware of these red flags, it should help you protect against future scams and rug pull projects.
First things first, a preventative measure if you just want to avoid rug pulls altogether, I would just stick to
Investing in The Top 100 Cryptocurrencies by Market Cap
These are gonna be the largest 100 cryptocurrencies and the best protection is just to not trade any small or new coins at all. The top 100 are likely to be very safe because scammers don’t usually make it to the point where the market cap of their project is larger than a billion dollars. The scam would have to be super elaborate for them to actually get to a billion dollars of market cap, and most of the time these scams are just kind of preying on the unsophisticated investor who wants to get rich really quickly. The scam is usually in the amount of the low millions.
In the case of the squid game token, Gizmodo estimated that the investor losses reached around $3.3 million. That’s the preventative measure, just don’t trade them at all.
Signs of a Rug Pull
What are some signals that a rug pull could happen, and what should you look for if you are interested in investing in a new coin?
1. Liquidity
The first red flag you really want to check for has to do with liquidity, you want to check if the liquidity is locked for that new token. Earlier, I said that one of the main ways a rug pull occurs is if the scammer decides to pull everything out of the liquidity pool. A sign of a good project is that the liquidity is locked away with a third party that is trusted, this actually ensures that the developer can’t pull out any of that liquidity at any given time.
It’s also a positive signal because the developer is basically locked into that project for the long haul, a locked pool helps safeguard investor assets. A good amount of time for liquidity lock-up is usually in the months or the years so that you know that the liquidity won’t be removed anytime soon. A good resource to use is a website like Team.finance, or RugDoc.io, that’s where you can basically look up liquidity lockup periods for any type of token.
Another option that you have is to go into the cryptocurrency project’s discord or telegram group, and just ask them for the lock-up contract that you can look up. If the project is legitimate and the leadership is transparent, they should have no problem providing this information.
Transparency and Leadership
Speaking of transparency and leadership, you really want to do your own research when it comes to the team and the people that are working on that project. In the case of the squid game token which was rugged, they named someone called David Canny as the CEO, who was described as a UC Irvine Alum, who had five years of experience at Netflix. In actuality, no such LinkedIn profile actually existed. There were also other executives named on the website that drew blanks on google as well.
As a general rule of thumb, if you can’t find any legal information such as the company’s name, real names of people involved, or track records on cryptocurrency, it’s usually a red flag and should be avoided. If you go through a website and have more questions rather than answers about the team, or if the founders are anonymous, it’s likely a project that you should stay away from.
Polkadot
Here’s an example of a good website, if you actually visit the Polkadot projects page, and scroll all the way to the bottom, you’ll actually find their about section. If you click on it, you’ll actually find who’s building Polkadot. These are the three founders, Robert Habermeister, Dr. Gavin Wood, and Peter Saban. They clearly have real faces and real backgrounds, and if you actually look them up on Google, which I bet if you looked up Dr. Gavin Wood on Google, you can see that he is a computer scientist from England and the co-founder of Ethereum, and creator of Polkadot and Kusama.
That might seem a little bit elementary, but you’d be surprised at how many people don’t check on this stuff. When the price of something is going bananas, some people just like to shoot first and ask questions later. But when it comes to investing, especially in small crypto projects, I can’t emphasize this enough, you got to do as much research as you possibly can before putting your paycheck into it.
2. White paper
The next thing that you should check out is the project’s white paper. A white paper is a document that details the entire project’s plans, roadmap, technical specifications, and more, It’s basically like an overview document for the entire project. A good project will usually have a robust white paper usually with stats, diagrams, hard data on the problem that they’re trying to solve, and more.
If you look at Polkadot’s white paper, you can actually tell it’s quite robust, it’s technical, it has a lot of diagrams and statistics, and you can tell that they have actually laid out this project in great detail. If the white paper is less than 20 pages, has poor grammar, or is just trying to promote the coin without any real-world use cases, it’s probably not a solid project. If it looks like it was drawn up in 20 minutes, that’s probably not a good sign of a good project.
As these scams become more and more elaborate, the scammers will probably try to take more time in trying to disguise the optics of their scam projects. It’s always important to check all of these red flags before investing because maybe they might have a really good white paper, but the rest of the red flags are going to be set off. You can’t just judge a project based on one factor.
3. Wallet Holders
The next thing that I would actually check is the wallet holders. You can check this on Etherscan or BSC scan which are smart contract explorers, and by typing in the project’s name you can see how many wallets are holding most of the tokens. If you see the top 10 wallets holding the majority of the tokens, or you see that wallets have a concentrated position in that token, it’s something to be wary of.
Let’s say, for example, one person has 25% of the total supply in their wallet, that could be a sign that you should be a little bit cautious. Even if it’s not a rug pull, whales with too many tokens can be a danger to the project, because if they decide to sell at any given time, the sheer amount of the tokens that they actually have could materially impact the price of that said token.
4. Project Focus
Another common thread that many rug pull projects have is they rely heavily on marketing, and not so much on the technicals or the actual quality of their project. If a project seems more focused on marketing rather than actually working, it’s not a good sign.
In the case of the squid games token, if you just read their tweet timeline you can actually see that most of the tweets are highly focused on marketing. Constantly talking about market cap, the dollar amounts are a constant attention grabber, and they’re thriving on attention and the fear of missing out.
Another thing, if you check out their community and if you look in their telegram and discord group, everyone is just talking about the price of the project or how much everyone’s going make if they all just hold or buy more. That’s not usually a good sign, either it shows that most of the community is rather short-sighted.
Influencer Marketing
Marketing can also come in the form of influencer marketing as well, even if you see someone that you might trust a lot like The Rock for example, and he’s promoting a cryptocurrency. You should be a little bit cautious here because he might have just been paid to tweet that or post whatever that social media post is, but he might have not had any connection to that actual project.
The squid game token attracts so much attention that even popular media outlets like CNBC started to cover the story, possibly feeding into the frenzy and the FOMO craze. I’m sure a lot of people just didn’t do any research, just saw a headline on CNBC, and went ahead and bought the token.
You should know that most news outlets are pretty biased, they try to get the story as quickly as they can, and they often don’t do due diligence. Basically, you can’t really trust the media, you got to really trust your own research.
Tokensniffer
Alright, I also want to share with you guys an excellent resource to arm yourself with before investing in any new cryptocurrency, and that is Tokensniffer. This is a really good resource, it basically lists the latest scam and hacks coins, as well as gives you ratings on different types of other coins to ensure that you have the best information possible for trading.
One of the ways that scammers can get up their projects so quickly is that they’ll just copy and paste the source code from a legitimate project, and then insert their malicious code into them. This website will automatically compare the code of new projects to what exists in their database, and also performs a checklist of each project to make sure they’re following the best practices.
If there are flags, they will flag them and put them on different lists. it just tells you what is a scam and what is a hack based on all the requirements it meets or doesn’t meet. Thanks for reading, and I hope that these tips keep you safe out there and save you money. Peace and Happy Hustling!
Related: How To Achieve The Crypto Passive Income Dream: Yield Farming
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