A “pushback,” which takes its name from the expression “pull the rug out,” is a cryptocurrency scam in which a developer attracts investors but pulls out before the project is completed, leaving buyers with a worthless asset. late.
Pullbacks cost investors more than $2.8 billion in 2021, according to research firm Chainalysis. Here’s how to spot and avoid them.
Advertisement
4.9
/5
5.0
/5
5.0
/5
Fees
$0
by online stock trading
Fees
$0
per trade for online US stocks and ETFs
Fees
$0.005
per share; as low as $0.0005 with volume discounts
Promotion
No
no promotion currently available
Promotion
No
no promotion currently available
Promotion
Exclusive!
US resident opening a new IBKR Pro individual or joint account receives 0.25% rate cut on margin loans. Levels apply.
Why do carpet moves happen?
These scams are not entirely new; they are part of a long history of investment schemes.
“It’s not a crypto-only phenomenon. It’s a human phenomenon. Crypto is just the latest way to do it,” said Adam Blumberg, a Houston-based certified financial planner who specializes in digital assets. But crypto -currencies pose particular risks due to loose fundraising regulations and their emphasis on decentralization.
Cryptocurrency projects often use “smart contracts,” which are agreements governed by computer software, not the legal system. This setup can be an advantage if it reduces transaction costs, but it makes it difficult to trace or recover funds if things don’t work out.
This setup, plus the hype surrounding new projects that promise huge returns and the relative anonymity of the crypto world, can lead to developers taking advantage of investors through scams like kickbacks.
Types of carpet pulling
Backtracking is an “exit scam” in which developers make promises and then quickly “walk out” with investor funds. Exit scams can fall into a legal gray area – some are illegal, while others are just plain unethical. Here’s how to tell them apart:
Steal liquidity happens when developers withdraw large amounts from the project’s liquidity pool. The liquidity pool is supposed to contain enough money to keep the program running if investors want their money back or if they need to execute large transactions. If a developer drains liquidity, a program may not function, and investors may not get their funds back. While many crypto projects have safeguards in place to prevent theft of liquidity, it is possible that unscrupulous developers will build vulnerabilities into their code. Theft of liquidity is considered a “hard pull”, meaning that developers intended to commit fraud from the beginning.
dumping, also known as a “pump and dump” scheme, occurs when developers inflate a coin’s value, usually on social media, and then quickly sell their own stock, crashing the coin’s value and leaving investors with a worthless currency late. This is considered a “soft pull” as it could be a targeted scam or a side effect of the volatile crypto space.
How to prevent carpets from pulling
Choose established products
Backoffs are most common with new projects that have not received the same scrutiny as more established cryptocurrencies such as Bitcoinwhich has been used and revised countless times.
Newer projects do not have a long-term track record, so there may be vulnerabilities that allow their organizers to extract value from investors and keep it for themselves. Here’s how to find safer investments:
Look at centralized exchanges such as Binance or Coinbase. While the presence of a cryptocurrency on a major exchange is in no way a guarantee of its quality or investment potential, these businesses will often review assets before offering them for sale.
Keep in mind that high rewards come with high risks. While cryptocurrency, in general, has seen periods of rapid price appreciation, the highest rewards often come from new projects where the risk is also higher. These are usually listed on “decentralized exchanges”, which do not rely on any centralized authority that would prevent unproven projects from joining.
Beware of hype and the fear of missing out (FOMO). Scammers can prey on the FOMO generated by rare-but-true stories of staggering returns, according to Rex Hygate, founder of DeFiSafety, a company that reviews projects in the field.
“It’s tempting. People made a lot of money. That’s a fact,” says Hygate. “Hope is real, though small, [and] therefore, criminal organizations make these carpet pulls in an organized and regular way.”
Know the code
The fate of any investment in cryptocurrency or blockchain projects rely on the integrity of the project’s computer code. You may not be a computer programmer, but you should at least understand how a product works before investing in it.
Check if it has been audited by a professional organization which is respected in the industry. Projects that have received good marks from auditors will often boost the results themselves.
Research the people
Some of the biggest red flags in the cryptocurrency world come down to human factors.
Do a background check. While it’s not unheard of for people to use pseudonyms in cryptocurrency, reputable developers often have websites and references that can determine their credentials.
Track your finances all in one place
Get started by logging in and linking an account.
Remain skeptical
Even if you do your homework, there is no guarantee of success. For example, the founder of Rugdoc.io, a service that reviews new projects, says she cheated herself on an NFT that was supposed to be a ticket to an event.
Diversification is as important in cryptocurrency as anywhere else in finance. Projects can fail due to technical errors or business mistakes, even without malicious intent.
“Guess whatever you invest in is going to have a problem,” said Leah, the Rugdoc.io founder, who asked that her full name not be used to protect her identity from scammers seeking retribution. “If you plan for failure, if it doesn’t fail, you’re going to have a really good day. And if it fails, you’re probably not going to be ruined.”
This article was written by NerdWallet and was originally published by The Associated Press.
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
UnCirculars – Cutting through the noise, delivering unbiased crypto news
