What is the difference between a carpet pull and a pump and shower scheme?

Scams and schemes lurk around every corner of crypto investing, making it difficult to navigate the landscape. Kickback and pump-and-dump schemes are two of the most pervasive and potentially catastrophic crypto scams. But how do carpet pull and pump and dump schemes differ?

What is a carpet pull?

In carpet pulling, developers deceive investors, “pulling the rug” from under them by carting away their crypto tokens. These malicious developers throw signs on social media platforms to attract investors. Once they reach their target, they transfer all the crypto invested into their wallets or siphon it through a crypto exchange.

The first step after the developer creates a token is to attract investors and promise enough profits on their investments when the token becomes popular. They also make use of DeFi (decentralized finance) applications, which are decentralized and can hide their identities. Many of the smart contracts created by the fraudulent developers on these decentralized applications (DApps) are already rigged with malicious code to successfully pull off their carpet-pulling operation.

Crypto Back Draw Examples

There have been many notable carpets in crypto history.

On October 28, 2021, AnubisDAO rose from the drums of the underworld with no website, no white paper, and little more than a logo inspired by DOGE and pseudonymous developers. The project then launched a sale, promising ANKH, its token, in exchange for ETH provided by the investors. The hype was impressive, and in less than 24 hours, investors contributed nearly $60 million.

With hours left until the close of the sale, all 13,597 ETH tokens have been removed from the pool and gone forever. The ANKH tokens received by the investors immediately became completely worthless, and the Twitter account that served as the official page of Anubis went offline. Unfortunately, little progress has been made, as no one is sure if one or all of the developers were responsible for the operation.

$60M is a large amount of money. But what about Faruk Özer, CEO of Turkish crypto exchange Thodex, which raised $2 billion, representing 90% of all mats in 2021?

The CEO ceased trading on the stock exchange in the same year of the Egyptian god’s fiasco. First, it was an interview that lasted days, then Özer blamed a cyber attack in 2018, followed by so-called suspicious transactions in more than 30,000 customers’ accounts. Finally, he promised that all customers would receive their funds, and then the Thodex CEO disappeared into the night.

What is a pump and dump scheme?

A “pump and dump” operation is a form of market manipulation where the price of a cryptocurrency is artificially inflated and, as it reaches a target, immediately dumped back into the market.

Most times, unlike pulling carpets, performing a pump-and-dump scheme requires little technical knowledge. A group usually carries out this scheme; they just need to choose a target currency and invest.

For maximum profit and easy manipulation, the target crypto should have a low market cap and liquidity. Then, these “pumpers” hype the crypto on social media. They do this by using the services of financial influencers such as YouTubers, prominent crypto Twitter accounts, and so on.

Other investors begin to buy into the false hype created by these influencers, thinking they are getting a good deal. Then the increase in demand starts to sharply increase the price of the crypto. Once it reaches a certain level known only to the pumpers, they sell all their possessions. This is the “dump” stage.

The supply caused by the pumpers’ sudden crypto release causes its price to drop rapidly. Understandably, other investors, seeing their much talked about crypto lose its value, panic and sell their holdings as the pumpers profit. At this point it becomes a rat race between the investors who are left with the now worthless tokens. The faster you sell, the lower your loss.

Crypto pump and dump scheme examples

Some anonymous developers have created a crypto project called Squid Game, modeled after the popular Netflix series. They also created a token, SQUID-USD, that can access the virtual games modeled after the series. These developers have promised various cash prizes to the winner of each game.

But there was a catch that no one noticed until it was too late. There was an anti-spill mechanism attached to the token. Unfortunately, this meant that investors could not sell. Not unless they had what the developers called “marbles”, which could only be obtained by winning games.

The matches still had to be live, so there was no way anyone could win and get marbles. So all owners could not sell no matter what. Since there were only buyers and no sellers, the token’s value skyrocketed from two cents on October 26, 2021 to $2,861 six days later. This was an astonishing increase of 14,300,000%.

As soon as SQUID-USD reached a record high, the developers who gave themselves a back door to sell their tokens dumped it. They walked away with $12 million, leaving the owners with nothing but a token now valued at less than a penny.

How to protect yourself from crypto scams

In backdraws, the liquidity behind the token is taken, making it impossible to sell the token. Although the price of the token has reached pump and dump points, some liquidity may remain in the pools. To protect yourself from crypto pump-and-dump schemes or scams, you need to learn to spot them.

1. Check Price Fluctuations

Check the price fluctuations before investing in any new cryptocurrency. If a price increase is not due to real news, it is always safer to consider it a pump and dump. It would also be best to stick to regulated, centralized exchanges like Binance and Coinbase, where you invest in existing coins rather than new ones.

2. Avoid the hype

A project might be a potential draw if you suddenly see celebrities and influencers discussing it. Legitimate crypto projects usually have a dedicated team and community marketing the token.

3. Liquidity

Before investing in any new project, check the liquidity pool. A token’s liquidity can tell you a lot about it. Avoid cryptos with low liquidity (around $100,000) as they can be easily manipulated. For example, the project developers can pump a few thousand dollars into the pool and artificially increase the token’s value.

4. Check Whale Wallets

Another easy way to detect backtracking scams is to check the token allocation. For any token you plan to invest in, check how much the top wallets hold. They are commonly known as whale purses.

If these whale wallets hold up to 20% of the total tokens available, it is probably a crypto scam or may soon turn into one. This is because these whale wallets can decide to dump their tokens and reduce the asset’s value within seconds.

You can check wallet balances using blockchain explorers. For example, you can use SolScan to check wallets on the Solana blockchain.

Risk is inevitable, but scams are not

In the world of cryptocurrency, investing in any token has associated risks. However, there are some risks that are not worth taking. This includes investing in projects with the above signs, hoping that they are not carpet pulling or “pump and dump” schemes.

Before joining any crypto project, do a background check. Make sure the project has a legitimate team, a solid liquidity pool and normal price fluctuations. Also, stick to regulated exchanges and be careful before digging into any project.