How to Avoid Rug Pulls as a Crypto User
The crypto market offers investors a wide range of opportunities, but it also comes with risks - one of the most notorious being rug pulls. These scams involve fraudulent projects that lure investors in, only to abandon them and disappear with their funds. With millions lost to rug pulls in recent months, it's crucial for investors to learn how to avoid rug pulls and protect their assets.
In this guide, we'll explain what rug pulls are, explore their different types, highlight key red flags to watch for, and outline the best ways to avoid falling victim to a rug pull.
What Is a Rug Pull in Crypto?
A rug pull can take different forms in crypto, but it generally refers to a situation where a development team suddenly abandons a project. In many cases, this means leaving with investors' money. In other instances, it involves removing all liquidity from a crypto coin or injecting malicious code into smart contracts to exploit token holders. The term comes from the phrase "pull the rug out from under," which means to suddenly withdraw support, leaving others in a vulnerable position.
According to Immunefi's annual report, nearly $1.5 billion was lost to crypto hacks and rug pulls in 2024. Out of these funds, only a little less than $116 million( just 7.7% of total losses) was recovered.
The goal of a rug pull is to deceive unsuspecting crypto investors into believing they are putting their money into a legitimate project. Scammers use flashy marketing, social media hype, and promises of high returns to lure victims. Once the fraudulent platform or cryptocurrency gains traction, they either disappear with investors' funds or remove all liquidity from the token, making it worthless.
What Are the Different Types of Rug Pulls?
There are three main types of rug pulls:
Liquidity Rug Pulls: This is one of the most common types, where scammers launch a token and pair it with a major cryptocurrency such as Solana (SOL) or Ethereum (ETH) in a decentralised exchange's (DEX) liquidity pool. Initially, they add liquidity and promote the project to attract investors. Once enough liquidity has been provided by others, the fraudsters withdraw all the liquidity from the pool, leaving investors unable to sell their holdings. This renders the token worthless.
Exit Scams: In an exit scam, fraudsters promote a token to investors, then abruptly disappear - either after collecting deposits or after selling a significant portion of the coin's supply. This leaves investors with an abandoned project and a token with a collapsing value.
Honeypots: Some scammers inject malicious code into smart contracts or program them in a way that prevents investors from selling the project's token. This allows the perpetrators to manipulate the price, mint an unlimited number of coins, or charge excessive transaction fees to trap investors.
What Are the Warning Signs of a Potential Rug Pull?
To understand how to avoid rug pulls, it is essential to recognise the most common warning signs:
Anonymous development teams with no verifiable history
Promises of unrealistically high returns
Overhyped projects with aggressive marketing campaigns
No clear utility or purpose for the token
Low liquidity or lack of liquidity locks for a specific period
Tokenomics with unusually large allocations for the development team or unclear distribution structures
How to Avoid Rug Pulls as a Crypto Investor
To protect yourself and learn how to avoid a rug pull, follow these key steps:
Do Your Own Research (DYOR): Conduct a thorough review of the project's team, whitepaper, documentation, website, tokenomics, and background before investing.
Use Reputable Exchanges: Trade on trusted platforms like VALR to minimise exposure to high-risk tokens and potential exit scams.
Say No to Unaudited Smart Contracts: Only invest in projects that have undergone third-party security audits by reputable providers. This helps protect against potential rug pulls and contract exploits.
Avoid Anonymous Teams: Be cautious of projects led by anonymous developers with no verifiable histories, as they can easily disappear with investors' funds.
Monitor Liquidity: Use tools like RugCheck to analyse a project's liquidity pool and check if liquidity provider (LP) tokens are locked. Ensuring developers cannot suddenly withdraw funds is a crucial step in avoiding rug pulls.
Stay Vigilant: Protect Yourself From Rug Pulls
Rug pulls remain one of the biggest threats in the crypto space, with scammers constantly finding new ways to exploit investors.
By staying vigilant, conducting thorough research, and engaging only with reputable projects and exchanges, you can significantly reduce the risk of becoming a victim. Always verify a project's team, smart contract audits, and liquidity locks before investing.
In crypto, security starts with you. Take the necessary precautions and never invest more than you can afford to lose. To learn more about how to protect yourself in the digital asset space, read VALR’s article about cryptocurrency scams and this blog about crypto security best practices.
Frequently Asked Questions (FAQ)
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Rug pulls occur because fraudsters use overhyped marketing and promises of high returns to lure investors into a fake project. Once they collect enough funds, they abandon the project or remove liquidity, leaving investors with worthless tokens. You can avoid a rug pull by conducting proper research, staying vigilant, and monitoring projects for warning signs.
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You can spot a rug pull by looking for key red flags, such as anonymous developers, unrealistic promises, excessive marketing hype, low liquidity, and unclear tokenomics. If a project seems too good to be true, it likely is.
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In most cases, recovering funds lost to a rug pull is nearly impossible. While law enforcement agencies or blockchain analysts may occasionally retrieve some stolen funds, it is rare. The best strategy is to focus on prevention rather than attempting to recover losses.
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After a rug pull, scammers leave with investor funds, a significant portion of the token supply, or all the liquidity deposited into a pool. This typically results in substantial financial losses and can cause the token's value to plummet to zero.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
