How to Protect Yourself From Rug Pulls in the NFT Space?
Main Takeaways:
An NFT rug pull occurs when the team of an NFT project abandons it and disappears with investors' money.
You can minimize your chances of falling prey to rug pulls by learning how to spot red flags.
Some of the common rug pull signs include an unrealistic roadmap, completely anonymous project members, and low liquidity.
Understanding how to spot common NFT scams like rug pulls is the first step to avoiding them and keeping your funds safe.
NFTs are increasingly appealing to investors. They have exciting use cases that revolutionize the art world and countless other industries, and some of them can significantly go up in value over time. Unfortunately, the growing NFT space also attracts bad actors.
Although fraudulent schemes aren’t exclusive to the NFT domains, there is an increasing number of scammers targeting NFT users and investors – especially beginners. To ensure a safe journey through the NFT space, it’s important to learn how to protect yourself from common scams such as rug pulls. Let's see how you can avoid falling prey to these schemes.
What Is a Rug Pull?
Rug pulls happen when an altcoin or NFT team abandons its project and disappears with the money raised from investors. In other words, a rug pull occurs when an individual or group behind an NFT project doesn't deliver on their promises after getting investor funds. Typically, the founders will release a small collection of NFTs to tease a bigger project with enticing benefits, such as exclusive access to events, blockchain games, or merchandise.
Additionally, many NFT creators pay influencers to promote their collections or host expensive giveaways in order to generate excitement around their projects.
In many instances, rug pulls happen quickly. However, there are also cases where a rug pull unfolds slowly, and the project is quietly abandoned with little to no updates or developments. Most commonly, rug pull schemes are perpetrated by an anonymous person or group, as this makes disappearing without a trace easier.
For more information on how to protect yourself from common NFT scams, check out our article on Common NFT Scams & Safety Tips 2022.
How to Protect Yourself From a Rug Pull?
Research the community and team
One of the best ways to avoid falling for a rug pull scam is to do your due diligence on the projects before investing. Thorough research on an NFT project should include finding out more about the community and investigating the team. Check out the entity’s social media channels, such as Twitter, Discord, and Telegram, to get a better idea of their development. Are promises being delivered upon? Does their website look professional? Research the project through reputable sources and try to find out if the team is professional and reliable. Legitimate projects with long-lasting value often have a proven track record and an established company behind them. Sizable and engaged communities could also be a good sign, but keep in mind that this could be created by fake accounts and bots.
Evaluate their roadmap
An NFT roadmap details the goals and strategies of an NFT project to build its long-term value. An NFT roadmap usually includes:
Project milestones
Short and long-term goals
Plans for marketing and growth
If the roadmap sounds too good to be true or simply unrealistic, it might be a sign that the project could be questionable. Rug pull schemes often create an ambitious roadmap to get the community excited but won't follow through on their promises.
Aside from the fact that they have no intention of achieving the stated goals, these goals are often too difficult to execute. To reduce risks, it’s safer to consider NFT roadmaps with realistic goals and scalable strategies. Even better is to look for NFT projects that have already delivered something significant and established their reputation.
However, remember that all projects can fail – regardless if they are small, big, new, or old. Like any other market, there will always be risks when dealing with NFTs, so consider the risks and don’t invest more than you can afford to lose.
Check the liquidity
An NFT project with low liquidity means it may be hard for you to convert the token into cash or another asset. Trading volume is a metric that may help you access a project's liquidity. A high trading volume indicates there are many users trading that collection. NFT projects with low volume, low liquidity, and a small community of overly excited buyers can potentially point to a rug pull scheme.
Conclusion
With more and more new NFT projects coming out each day, it’s important to watch out for common scams — rug pulls being among them. Understanding how such schemes work is the first step toward avoiding them. NFTs will always involve some risk, but learning to identify red flags that could be indicative of a scam will help you reduce risks considerably, keeping your funds and NFTs safe.
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DISCLAIMER: NFTs are an emerging asset class that is still evolving. The information in this article should not be construed as investment or financial advice. Always do your own research before making any decision to buy, sell or trade NFTs.