What is a Crypto Rug Pull Scam?

As the cryptocurrency industry has grown exponentially in recent years, it has been infiltrated by cybercriminals looking for victims in this booming market. One of the most notorious crypto crimes in use today is the backhaul.

Such scams have resulted in the loss of millions and millions of dollars, but how do they work, and how can you avoid falling for one?

What is a Crypto Rug Pull Scam?

Because the price of a cryptocurrency can shoot up to many times its original value in a matter of hours, many try the get-rich-quick approach when investing. Much of the crypto trading industry centers around buying low and selling high, so it’s no surprise that many traders are flocking to coins or tokens that hold a lot of promise. It is this hopefulness, or vulnerability, that cybercriminals take advantage of when they carry out withdrawal scams.

A crypto rug scam (the name of which refers to the fact that the rug is unexpectedly pulled out from under you) involves launching a token, attracting investment, and then pulling the plug. You may have heard of a withdrawal scam before, as it is also quite common in the traditional financial world. But the lack of regulation around cryptocurrency makes it even easier to pull scams, which is why they are now alarmingly abundant in the crypto market.

Crypto withdrawal scams often involve tokens rather than coins. This is because tokens can be built on an already existing blockchain, such as Ethereum or Zilliqa. Because these popular blockchains have a native cryptocurrency that has value, users can buy tokens from a project using the native currency. Let’s create our own example of a pump-and-shower trap to better understand why it’s useful for cybercriminals.

An example of the Crypro Rug Pull Scam

Say a new project called BonsaiDAO was launched on the Binance Smart Chain. Binance Smart Chain’s native coin, Binance Coin (BNB), can be used to purchase the native token of BonsaiDAO, which we will call BONS. Let’s say an investor bought 5,000 BONS for 1 BNB (which is equivalent to about $300 currently).

Because the investor paid for the project in BNB, the scammer can quickly liquidate this BNB in ​​cash or send it to another wallet for further use. So, in a kickback scam, the criminal takes the investor’s $300 of BNB, along with all other investments made in the form of BNB, and hits the road.

But why would anyone invest in a new coin that has not proven to have any long-term value?

Pump the carpet Pull

Marketing plays a big role in back pulls. Scammers market and promote their mat pull tokens heavily to create a buzz around their project. This is often done through social media (especially Twitter), where a polished and professional image of the project can be faked. Scammers will also often launch an initial DEX offering (IDO) to raise capital on a decentralized exchange. It’s essentially just launching a set amount of tokens on an exchange so they can be traded.

As the hype grows, so do the investments. People see the project’s social media accounts, notice an increase in the trading of a crypto, or hear from other investors that there is a new hot crypto on the market, and decide to make their own investment in the hopes that the crypto will gain significant value. Once the project has enough financial backing, everything collapses.

When cybercriminals launch a carpet pull token, they keep a large amount of the inventory for themselves. Consider again the BonsaiDAO example. If 1,000,000 BONS are introduced into the IDO, the scammers decide to keep 75 percent of the BONS for themselves. Why? Because as investor numbers grow, the value of BONS increases, and the scammers have more money in their back pocket in the form of BONS.

So, let’s say BONS reached a value of $20 per BONS token within a few weeks. If the scammers kept 75 percent of the circulating stock, they now have $15 million in BONUS for themselves. In light of this hefty price increase, the scammers sell all their BONS back to the decentralized exchange, making a huge profit.

Because 75 percent of the total supply has now been sold back, demand falls, and so does the price. This means that investors who put their faith and money into BonsaiDAO are now left with nothing.

This is how a rug pull scam can often play out, but there are two other types of rug pulls: liquidity theft and limiting sell orders.

What is liquidity theft?

Liquidity theft rugs are also very common in the crypto industry. In liquidity theft scams, scammers list their new token and pair it with a known cryptocurrency, such as Ethereum. Cryptos can be paired in this way in liquidity pools, a popular tool used by investors to make a profit. The amount of each crypto in these pools can be changed based on value, demand, etc.

When a scammer creates a pool in which their scam is paired with a valuable asset, and more individuals invest in that pool, their scam will increase in value. To even things out, more of the well-established tokens will be added to the pool and some of the scam tokens will be removed. Once the token has become valuable enough, and there are enough of the other cryptos in the pool, scammers will withdraw all of the latter from the pool.

What does limiting sell orders involve?

Scammers can also design their token’s code in a way that only allows a limited amount of it to be sold on a decentralized exchange. This means that investors invest in a coin without realizing that they will not be able to trade it. When the scammer has made enough money through investments, they sell their portion of the tokens back to the exchange and make a profit.

Many kickback scams have taken place in the crypto industry so far, with some managing to steal millions from investors. For example, consider the Squid Game crypto retreat (a limit sell order scam). This crypto went from being worth a fraction of a dollar to over $90 in a matter of days. The scammers here capitalized on the hype surrounding Squid Game, Netflix’s hugely popular South Korean show. As soon as SQUID reached its highest price, the developers pulled the plug and stole more than $3.3 million from investors.

But if so many people have fallen for these rug pulls, can they really be avoided?

How to spot and avoid carpet pulling scams

The first thing you should look at when considering investing in a cryptocurrency is its age. Was it only created a few days or weeks ago? If so, it is definitely a flight risk. Without seeing the long-term value of a crypto, you simply don’t know if its creators have illegal intentions.

Second, if a crypto’s price has risen exponentially shortly after its launch, this could be an indication of a backtracking scam. Scammers often don’t want to wait months or years to make a profit, and will try to increase their token’s price as quickly as possible. So watch out for this.

You should also check whether the developers of a project are anonymous or not before investing. Scammers will always remain anonymous for obvious reasons, so it’s worth considering this when researching an asset. However, some large, legitimate projects also have anonymous creators. Even Bitcoin’s creator is unknown. But the identity or background of developers can be very telling.

Check the social media accounts and other sources around a token’s developer(s) to see how well established they are.

You should also consider the distribution of a token before investing. Remember that backdraft scammers will often keep a large portion of their token to dump. This can be one of the clearest signs of an impending carpet pull.

You can also check lists of scam tokens, which you can find via a simple browser search, to see if your chosen token is blacklisted.

Withdrawal scams are common in the crypto industry

Crypto rug pulling scams can cause huge financial havoc and have left lasting marks on the crypto industry. These scams can be so sophisticated that even an experienced trader can be fooled, and the ease with which they can be pulled off is truly alarming. This is why it is crucial that you remain vigilant and aware of the key signs of a possible withdrawal scam.