If you’re deeply immersed in the cryptocurrency landscape, meaning you have a solid crypto investment portfolio, you are probably already familiar with all the advantages of virtual currency. After all, investing in crypto and meme coins can be a lucrative undertaking that can turn you into an affluent individual over time – provided that things go right, of course.

But how much do you really know about the pitfalls? More precisely, how familiar are you with crypto rug pulls? Don’t worry if you have no clue what they are—this article provides guidance on different types of crypto rug pulls and gives you precious tips on how to avoid them.

What are crypto rug pulls?

Even though there are different types of rug pulls, they all follow a similar scenario. The crypto developer performs a scam where they promote the project to attract investors’ funds, only to disappear down the line, taking the money with them. Rug pulls can be performed by one individual or a team of them.

These scams are usually exceptionally orchestrated, making it difficult for people to notice the various strategies that are used to lure people. For example, some rug pulls even feature public figures of trust, which is how they go disguised for a long period of time. 

Types of rug pulls

While you should always be on high alert when dealing with cryptocurrency, learning about the different types of scams will help you be more cautious and search for the right things. Knowing which types of rug pulls lurk will help you combat danger with sufficient information, ultimately keeping you away from both hard and soft rug pulls – the broadest categorization for these scams.

Hard rug pulls are characterized by how quickly they happen. They are very sudden, which is why many investors recognize they have been scammed only once they lose all of their money.

Soft rug pulls are more sophisticated, as they are developed over a long period. The scammers lull the investors into a false sense of security, having them believe their funds are kept safe. All the while, they are sneakily plotting how to get the money and taking action towards it.

The most notorious rug pulls include fake projects, pump-and-dump schemes, team exits, and liquidity pulls.

Fake projects are a type of rug pull that ultimately leaves investors with worthless tokens. The scammers work on creating a seemingly valid project, which attracts investors and urges them to participate in asset acquisition. Once a sufficient amount of assets is sold, the scammers disappear with them, which results in tokens that aren’t worth anything.

Pump-and-dump schemes are among the most common rug pulls, and they are characterized by an artificially inflated token price through coordinated buying. As soon as the price reaches its peak, the creator will sell all of the tokens and crash their value. The token price will oftentimes drop 90% within the first week of trading, leaving investors high and dry.

Liquidity pools are complex, as they entail a sequence of events that ultimately lead to a token’s crash. First, malicious participants have to remove liquidity from a token pool. Then, the token must become so unappealing that it loses buyers and sellers. This results in a crashing token value, negatively impacting all of its current holders.

Finally, team exit schemes are sometimes seen as the least malicious of all, as a token collapses after it receives no support from participants, who were left stranded by the sudden disappearance of one or more team members. 

How to spot rug pulls

Identifying rug pulls is the best way to ensure maximum safety in the crypto universe. Here are some things that should help:

• Doing your research. A good rule of thumb is never to invest money in crypto before performing thorough research. If you are interested in Cardano, for example, the only logical course of action is to research the price prediction and gauge the public’s opinion on community forums. Even more research is needed when buying new or unknown crypto. 
• Verifying the team. Who are the project’s developers? How much is known about the team members? Do they all have a credible track record? Dig up as much information as you can about their experience and previous projects, as it will give you a clue of how trustworthy they are. 
• Checking community engagement. Do you know how involved the community is in the project’s development? One of the best ways to search for rug pulls is by researching whether the project has transparent communication channels established. Discord and Telegram are generally considered more trustworthy than others. 
• Staying informed. In the 21st century, staying informed about the latest crypto trends shouldn’t be too difficult. By monitoring for the latest news, trends, and predictions in the crypto space, you’ll likely collect precious information regarding potential risks and opportunities associated with every project. Make sure you get your information from reliable sources, such as official project announcements and reputable news outlets. 

How to avoid rug pulls

Once you learn all the ins and outs of scammers, avoiding rug pulls becomes much easier. Here are some things you can do to stay on the safe side:

• Scan for red flags. Being on high alert for red flags is the best way to stay safe in the crypto landscape. Anonymous teams, promises of high and guaranteed returns, and a lot of pressure to invest quickly are among the most common tell-tale signs of crypto rug pulls. 
• Avoid unverified projects. Investing in Bitcoin and Ethereum comes with a certain level of security, but the same can’t be said for newly launched projects that are still in development. The best way to avoid rug pulls is by not investing in them altogether; however, if a project has caught your eye, make sure it has positive reviews from reputable sources and is developed by a team that you can check out and verify.
• Check security audits. All reputable crypto projects should go through third-party security audits. Before investing your money, check whether the project has been audited, and scan the report for any potential security vulnerabilities. 
• Trust your gut. When it comes to avoiding crypto scams, your intuition is your best weapon. If something feels too good to be true, it probably is – thus, it warrants more caution and fact-checking. 

The bottom line

Although fascinating and full of opportunities, the crypto world is also filled with uncertainties and hidden traps. Rug pulls are among the greatest dangers that lurk, so learning how to spot them is key to protecting your money and having a positive experience. A bit of research goes a long way, so make sure to verify every aspect of the project before handing over your funds.