Where did it all go? Crypto Rug Pulls and Exit Scams
Crypto investors face various risks. Among the most notorious are “rug pulls” and “exit scams.” We provide an overview of these fraudulent practices, how they work, what red flags to look out for, how to mitigate the risks, and what options victims have.
Understanding Crypto Exit Scams
While all rug pulls are exit scams, not all exit scams are rug pulls. A crypto exit scam is a broader category of fraud where the perpetrators collect funds for a purported cryptocurrency venture and then disappears with most of the money.
Common Types of Crypto Exit Scams:
- Rug pulls (Explained in this article)
- Fake ICOs (Initial Coin Offerings)
- Ponzi schemes disguised as crypto investments
What are Crypto Rug Pulls?
Crypto rug pulls are deceptive practices where project developers suddenly abandon a cryptocurrency project and disappear with investors’ funds. The term “rug pull” comes from the phrase “pulling the rug out,” as investors are left with worthless tokens or NFTs after the liquidity is removed from the project.
Key Features of a Rug Pull:
- Sudden disappearance of project developers. They would usually use fake names and contact information to begin with.
- Rapid and extreme drop in token value. Pictured beautifully by the Japanese Candle Stick (The almost perfectly vertical red line on the graph):
- Inability to sell or trade the token. What many investors don’t realize is that the groundwork for a rug pull is often laid from the beginning. The creators of these fraudulent tokens frequently include hidden features in the smart contracts – the code that governs how the token operates. These concealed mechanisms give the developers behind-the-scenes control over the token’s behavior. Only the creators can decide when the selling happens.
Case Study: The Squid Game Token Rug Pull
One of the most infamous rug pulls occurred in 2021 with the Squid Game cryptocurrency. Here’s what happened:
- Developers created a token based on the popular Netflix series. This is a huge red flag as the fraudsters will gladly piggyback on top of popular trends or memes in order to create more capital.
- The token price skyrocketed to $2,861!
- Investors discovered they couldn’t sell their holdings due to hidden features in the smart contracts or other concealed mechanisms.
- Creators withdrew approximately $3.38 million and rode into the sunset.
- The token’s value plummeted to near zero.
This case exemplifies how quickly a rug pull can occur and the devastating impact it can have on investors.
How to Protect Yourself from Rug Pulls and Exit Scams
Do Your Research: Investigate the project’s background, team members, and their track records in the industry. A good practice is to reverse Google search the images, try googling their names, and any information that they had previously shared.
Analyze Smart Contracts: Look for potential vulnerabilities or suspicious functions in the project’s smart contract. However, it’s important to note that smart contract analysis is a highly complex task that requires specialized knowledge in blockchain technology. You might consider using a specialized service to assist you, such as our smart contract analysis services.
Be Skeptical of Promises: Exercise caution with projects promising unrealistic returns. We often see crypto projects promise obscene returns, sometimes up to 200% in a day. These are borderline impossible returns and are, to our knowledge, always followed by a scam.
Check Liquidity Locking: Projects that lock their liquidity for a set period generally present a lower risk of rug pulls. A project without a significant portion of its liquidity locked, or with a very short lock period, might be planning a quick exit.
Invest Gradually: Start with smaller investments to test the waters. You should do all the steps above first, as many fraudsters are aware of this, and will issue small withdrawals to build confidence in victims.
Red Flags to Spot Rug Pulls and Exit Scams
- Anonymous or unverified team members. This is the most important step to perform due diligence on. Consider asking for advice from a professional before making any big investments.
- Questionable tokenomics (e.g., small group holding large percentage of tokens). This can be checked via a public block explorer. If a small number of wallets are holding over 50% of tokens, we would advise against investing. In cases of basic rug pulls, this number would often go above 90%.
- Excessive promotion with limited substantive information. If you bombarded by ads or contacted by an army of bots promoting the project, while the project itself is just a basic token, consider it a red flag.
- Pressure to invest quickly or “fear of missing out” tactics. Short time windows are a common tactic used to invoke bad decisions from victims.
- Lack of clear project roadmap or whitepaper. Experienced fraudsters would often create a fake whitepaper or a roadmap. You should read through them thoroughly and only then decide.
What to Do If You’ve Been Hit by a Rug Pull or Exit Scam
Use the experience to improve your due diligence process. Unfortunately this is sometimes the best and only way to move forward. Lawyer or investigator fees are often high and even then you might be throwing good money after the bad.
Report to the cryptocurrency exchange or platform and notify relevant financial regulators or law enforcement agencies. Always do this before considering the next steps.
Share your experience to warn others. Posting on Reddit or other forums/social media can help other potential victims, or help law enforcement reach you in case they take action on the fraudsters. This is a double-edged sword however, as many scammers resort to contacting victims to promise recovery of the funds, while only attempting to scam them again. Unfortunately, we encounter many victims who reach out to us after being scammed only to be scammed again by recovery scammers.
If law enforcement is not helping, you can hire private specialists like Rexxfield or other legitimate crypto recovery services.
Request a free consultation with our blockchain experts
To engage with Rexxfield or similar specialized services:
- Prepare a detailed account of your case, including all relevant transaction data and communications.
- Contact our investigators for an initial consultation by filling in our form.
- They will assess your case and provide a professional opinion on whether they can assist you.
- If they believe they can help, they will propose a tailored strategy and discuss potential costs and timelines.
It’s important to note that while these services can increase the chances of recovery in some cases, there are no guarantees in the complex world of cryptocurrency fraud. Always conduct due diligence before engaging any recovery service and be careful with firms promising guaranteed results.
Conclusion: Staying Safe in the Crypto World
Rug pulls and exit scams are everywhere. But with the right knowledge, investors can reduce the risk of falling victim to one of these scams. By being aware of these scams and following appropriate precautions, you can participate in the world of digital currencies with increased safety and confidence.
Remember, in the world of crypto investments, if something sounds too good to be true, it probably is. Stay vigilant, do your research, and never invest more than you can afford to lose.
