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In this article, we’ll talk about one of the most prevalent risks in the world of cryptocurrency: Rug Pulls.These schemes can catch investors off guard, but understanding them is the first step to protecting yourself.
 What is Rug pull?
In the cryptocurrency world, a “rug pull” happens when the creators of a project suddenly abandon it and take away all the money invested. This term comes from the idea of unexpectedly removing support, like pulling a rug out from under someone.
In 2021, during a period of high cryptocurrency prices, rug pulls caused people to lose around $2.8 billion. This was almost as much as in previous years, showing a big increase compared to 2020, according to a report by Chainalysis.
Cryptocurrency scams are common because there aren’t many rules from governments or other authorities. Unlike regular businesses that have strict government oversight, the crypto world is controlled by private groups, which makes it easier for them to take advantage of people.
Types of Rug Pull
Now, we’ll discuss the different types of rug pulls, so you can spot them and protect your investments.
Liquidity theft
Liquidity theft is a common rug pull tactic in cryptocurrency. A developer launches a new altcoin on a decentralised exchange (DEX) and attracts investors by promoting its potential. As more investors join, the coin’s value increases. Suddenly, the developer withdraws all ETH from the liquidity pool, leaving investors with worthless tokens and no way to trade them. It’s like a sudden betrayal, leaving investors stranded.
Dumping
Dumping in cryptocurrency happens when developers or promoters who own a significant portion of the coins sell them off rapidly as prices rise. This sudden sell-off leads to a sharp drop in prices, causing losses for investors who bought at higher prices.
Technical Manipulation
Technical manipulation in cryptocurrency occurs when developers create digital tokens with features that hinder regular investors from selling easily.
They manipulate the token’s availability for trading to their advantage.
 As the token’s price rises, they swiftly sell off their holdings, leaving other investors with worthless assets. It’s akin to altering game rules unfairly, disadvantaged others with no opportunity to succeed.
What Measures Can Investors Take to Safeguard Against Potential Rug Pulls?
Assessing the White Paper
Examining the project’s white paper provides crucial information about its goals and plans. Check for consistency between the white paper and the project’s website. Also, verify the availability of the development team on platforms such as Reddit or Telegram. If developers are unable to furnish essential details about their project, it raises suspicions.
Absence of a Website
While not all projects begin with a website, reputable ones often do. If the developers lack a dedicated domain for their project, it’s a warning sign to proceed with caution. Beware of fraudulent projects that either claim to be under construction or provide vague launch dates.
Beware of Anonymous Developers
While the identity of Bitcoin’s creator remains a mystery, anonymity among developers of other projects raises red flags. If the individuals behind a cryptocurrency or DeFi project choose to conceal their identities, it’s prudent to exercise caution and consider alternative investments.
Verify Locked Liquidity
Legitimate projects often lock liquidity in the blockchain, preventing developers from accessing funds in the liquidity pool. This practice enhances trust and protects against sudden liquidity reductions or theft. Lack of locked liquidity leaves investors vulnerable to potential rug pulls.
Total Locked Value (TLV)
Total Locked Value means the total investment in a project and serves as a credibility indicator. Established projects increase TLVs in the hundreds of millions or billions of dollars. Conversely, projects with minimal TLVs should be approached with caution, as they may lack sufficient investor confidence.
Assess Liquidity Levels
Low liquidity in a cryptocurrency makes it challenging to convert into fiat currency, leaving it susceptible to price manipulation. Analyse the trading volume over the past 24 hours to gauge liquidity.Â
Experienced investors typically look for trading volumes exceeding 10% of the coin’s market capitalization.
Token Distribution
Looking at token distribution on blockchain explorers shows how tokens are spread out among different holders. If a large amount of tokens is held in just one wallet or a few wallets, it could mean that someone has a lot of control over the token. This might be a sign of manipulation and needs to be looked into carefully.
Look for Audit Reports
Reputable projects often undergo independent security and financial audits, underscoring their authenticity. While the absence of an audit report doesn’t necessarily denote fraudulence, thorough research is advisable before investing.
Utilise Detection Tools
Online tools like Token Sniffer and Rug Doctor can help identify potential rug pulls by scanning project codes and flagging common scam tactics.Â
Integrating these tools into your investment analysis can offer an extra level of defence against deceitful tactics.
Rug pulls present a notable hazard to crypto investors. By placing a premium on thorough research and implementing the strategies mentioned above, investors can reduce these risks and enhance their investment security.
Wishing you safety and best of luck!
Remember: In crypto, knowledge is power.Â
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