When Stepping Into the Blockchain World, Beware of “Pump and Dump” and “Rug Pull” Scams
Scam projects can be found anywhere in the cryptocurrency investment space, making it challenging to predict and find sources. The two crypto scams that are most frequently encountered, "Rug Pull" and "Pump and Dump," have been widely used and caused significant harm. Investors who are interested in blockchain and cryptocurrency projects should learn how to carefully review and investigate the projects' financial records before making an investment. In this article, you will learn how to identify these two scams and take precautions to protect yourself.
What is a Rug Pull scam?
Rug pull is about lowering the tokens' liquidity on exchange platforms so that investors cannot resell them.
Developers who want to do a rug pull or defraud investors will buy up the coins or crypto tokens by beginning with advertising tokens on social media to draw investors. They will transfer all invested cryptocurrency coins to their wallets or through cryptocurrency exchange platforms once they have achieved their goals and attracted the desired number of investors.
To summarize briefly, the first step after developers create tokens is "to defraud investors" and spread the myth that they will make enough money from making an investment once tokens become popular. They will employ DeFi software, which is decentralized and can hide their identities. This includes forging smart contracts, which need code to fully acquire assets.
Example of Rug Pull
A farming project called "Luna Yield" on the Solana platform initially displayed signs of dishonest behavior. Before withdrawing about 10 million US dollars from liquidity, it started by deleting websites and shutting down the Telegram and Twitter accounts. Investors attempted to quickly withdraw their funds from the platform after learning of Lunar Yield's removal of its online media accounts, but they were unsuccessful because the pool's balance had already been depleted. Later, there were investigations and declarations from the Lunar Yield community that the project developers had carried out the transaction that resulted in a rug pull.
What is Pump and Dump?
Pump and dumps raise the price speculation of the coins or tokens to an unsustainable level, luring investors in. The team behind the price speculation will dump at the highest profit when the desired target is reached. The token price will then drastically decline until investors see no return on their investment. The investors may start to compete with one another because the quicker they sell, the bigger the loss will be.
The pump-and-dump scam's working capital remains in the pool, but the price will be significantly reduced. This is different from "a rug pull" where the liquidity is removed from the pool and renders the tokens non-tradable.
In contrast to a rug pull, where the pump-and-dump team will plan for a choice and invest only in the targeted currencies, a pump-and-dump scam only requires a little technical knowledge to execute. Scammers will choose the targeted cryptocurrency that is in the normal market price range and has low liquidity in order to make the highest profit and manage it easily. The pump-and-dump team will then promote the cryptocurrency they have chosen on social media and pay influential people in the financial world like famous YouTubers or Twitter users to advertise it.
Example of Pump and Dump Situation
A member of the well-known e-sports team "FaZe Clan" promoted the new digital currency "SaveTheKids" in the summer of 2021 by claiming that it would be used to treat children all over the world. But it turned out to be a fraud. The curators and celebrities who came up with the coin received tens of thousands of dollars, while the coin's supporters received worthless tokens and the kids received no treats at all.
How can investors notice and avoid these two crypto scams?
Basically, you should carefully review the financial records of any crypto projects before joining them to make sure that there are teams available, transparent schemes, reliable sources of liquidity, and normal price fluctuation. Selecting the regulated exchange platforms is recommended. The following observation can also be used to think about and raise doubts before investing in any project.
- Regularly monitor the suspicious price fluctuation
You should check price fluctuations before making an investment, particularly when the price is rising as a result of rumors or false information. If you notice a sudden change in the price or token trading volume in the financial records, it might be a sign of market speculation to drive up the price quickly without any significant news or connection to the crypto project. If you have this suspicion, you can assume that the transaction is a fraud or pump-and-dump scheme.
You should only use exchange platforms that are regulated and trustworthy by looking at the white paper that offers target information and a concisely described scheme. The top-tier coins are preferable to the new ones with obscure histories or unidentified developers as they will be simpler to scam.
- Notice the liquidity
You should assess the overall liquidity before deciding to invest in the new project. The project's viability can be determined by the tokens' liquidity. Additionally, you should avoid crypto coins with low liquidity, such as the project with liquidity worth about 100,000 US dollars, as it is simple to speculate on the price of the coin by injecting only a few thousand US dollars into the pool.
- Avoid coins with exaggerated propaganda
Most rug pull projects typically employ well-known figures in the industry for marketing campaigns that provide inflated results, such as celebrities talking about coins. Any legal cryptocurrency project will generally have a dedicated team or community for marketing its tokens.
- Notice the whales’ wallets
Examining the distribution of the planned token investment is another simple way to look for rug pull fraud. You can see how cryptocurrency investors who have large holdings (whales) hold their tokens. Because these "whale wallets" have the ability to abandon tokens and lower the value of the assets in a matter of seconds, it is likely a sign of a future scam if these whales' wallets contain up to 20% of all the tokens that are currently available. There are many Super Apps or trackers for token analysis currently on the market that can monitor whales' wallet activity. One example is Nansen's platform, which has features like Wallet Profiler and Token God Mode.
In the world of cryptocurrencies, every investment carries some risk. When you join projects that show signs of scams, such as pump-and-dump schemes or rug pulls, you run some risks that are not even worth it. As a result, you should be aware of the warning signs of unreliable behavior before entering any projects and carefully examine the financial records of any interesting projects before investing.