Crypto Rug Pulls: What They Are & How To Protect Yourself

Touching grass is a good thing. There’s this saying they have in French: couper l’herbe sous le pied de quelqu’un. Literally, it means “to cut the grass under somebody’s feet.” Figuratively, it means to block someone from gaining an expected advantage, either by taking that advantage away, or by taking the place of the person in question.

We have a similar expression in English: to “pull the rug out” from under someone. And in the world of cryptocurrency, rug pulls are as common as blades of grass. You need to watch out for this particular type of scam; here’s what you need to know to protect yourself and your bankroll if you’re planning on using crypto for betting.

What Is A Crypto Rug Pull?

It’s like “pump and dump” on steroids. Instead of just artificially hyping a coin and selling at the top, the general idea with crypto rug pulls is to raise money for a coin that’s attached to a certain project, hype that project like it’s going to save the universe and wait for the coin to rise sharply in value before quietly skipping town.

This “exit scam” can be done either by creating a fake project that was never actually going to get off the ground, or by removing liquidity from the token pool itself. Alternatively, the scammer and their team can just disappear with the money at any time, whether or not the project was viable in the first place.

Cryptocurrency invites these kinds of scams with its decentralized trading platforms. Squid Game Token? Rug pull; the developers disabled their coin so no one could sell it, and took off with the money. OneCoin? Rug pull; the coin wasn’t actually backed by anything, costing investors over $4 billion when the Ponzi scheme collapsed.

How To Identify And Avoid Crypto Rug Pulls

The best way to protect yourself from getting the rug pulled out is to avoid stepping on it. First, don’t be greedy; those dollar signs (or Ethereum signs) in your eyes will only blind you to the thousands of rugs being laid out in front of you.

As for the rugs themselves, if someone is telling you that a certain coin is going to the moon, consider the source. Is that someone reliable? Do your research and find out if you’re not sure. If they are indeed plausibly reliable, take the next step and look at the project in question. Is it an established project with a proven track record? Just say “no” if it’s not – unless you have a strong appetite for risk.

You’re also more likely to find these rug pulls in emerging spaces like decentralized finance (DeFi) and non-fungible tokens (NFTs) than you are on centralized marketplaces like Coinbase. Decentralized crypto exchanges may offer lower fees, but they also allow scammers to create new coins without a “code audit”, thus creating new rugs to pull out from under you.

High-Risk Projects to Avoid

If you’re going to get into crypto at all, the safest thing to do is just buy some Bitcoin – or shares in a Bitcoin ETF – and hold onto it. You probably don’t have to worry too much about someone putting a premature end to the most established digital coin on the market.

The more risk tolerance you have, the more you can explore other areas of the cryptocurrency space. But there are two high-risk regions we want to warn you about: staking and yield farming. Staking allows you to earn passive income by putting your coins in a larger coin pool, kind of like when you earn interest on your bank account; yield farming also involves pooling your crypto with a specific DeFi platform and collecting the revenue generated from the fees.

Again, these are not areas you’ll be getting into if you stick with Bitcoin. Staking only works with coins that use “proof of stake,” rather than “proof of work,” as their consensus mechanism for verifying transactions. That means Ethereum for the most part, although Solana and other such coins can be used. Almost all yield farming is done in Ethereum as well.

Whatever your risk tolerance, the shakier the ground you’re standing on, the more likely you’re going to end up falling on your toches. If you’re going to invest in higher-risk cryptocurrency markets, put a certain expected loss to rug pullers into your accounting – then decide if it’s still worth it to hop on board. Otherwise, keep looking for firm ground to stand on while you’re reaching for those crypto stars.