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Rug pulls are a type of fraud in which a team of developers or crypto project creators increase the value of their token before dumping their holdings at an inflated price or extracting its liquidity.
Rug pulls happen mainly in three ways: token dumps (token release), liquidity theft and issuance of unsaleable tokens.
Have you been the victim of a rug pull? Report the incident immediately to the appropriate authorities and the Binance Support team.
Rug pull is a common scheme in cryptocurrencies in which scammers create a fraudulent token, inflate its value to attract buyers, and abscond with investors' money after the token reaches a peak price. These scams can be devastating for crypto investors, leaving them with essentially worthless assets.
This edition of Know the Scams will explore how these scams work and provide you with some essential tools to detect and avoid these schemes. Before we take a closer look at how these moves work, it's important to understand the three main types of rug pulls.
Interested in learning more about other scams involving cryptocurrencies? Check out our full series of articles here.
What are the three types of rug pulls
While all rug pulls follow the same logic of increasing the value of a token and taking money from investors, there are some ways in which they can differ in execution. Here are the three most common types of rug pulls that you, as a crypto investor, may encounter.
1. Create an attractive token and crash it
Scammers create tokens with false value, convincing investors of high returns while holding the majority of tokens. When the price reaches a certain point, the "project team" sells all of its tokens, causing the price to fall.
2. Steal liquidity
Crypto projects on decentralized exchanges need a liquidity pool – a large amount of funds locked in a smart contract – to become tradable. Scammers will lure early investors into contributing to the liquidity pool before withdrawing all funds contained within.
3. Create a token that cannot be sold
This method involves a simple coding trick that, upon activation, prevents investors from selling their tokens. Once enough retail investors buy the token, the “project team” activates the code and drops their positions.
How rug pull scams work with cryptocurrencies
Here's a closer look at the common steps you'll see in all types of rug pull strokes.
1. Create an attractive design
Scammers start by launching a new crypto project and attracting potential investors through social media platforms such as Twitter, Instagram or Discord. They often promise high returns and use flashy marketing tactics to build excitement around their token.
2. Disguise and bait
Once investors start contributing funds, scammers try to create the illusion of progress. They can release updates, list the token on exchanges, or claim partnerships with reputable companies. These partnerships are often made up or have no real value. All their efforts are usually just smoke and mirrors to attract more investors and increase the price of the token.
3. The rug pull
The token reaches a certain price or, in the case of a liquidity pool rug pull, attracts a certain amount of funds. The scammers carry out their plan and abandon the project, taking all the money with them. Investors are left with worthless tokens and most of the time there is no way to get their money back.
Interested in learning more about other scams involving cryptocurrencies? Check out our full series of articles here.
How to Research Crypto Projects to Avoid a Rug Pull Scam
One of the golden rules of investing: always do your research before investing money in anything. Here are some useful tools to help you check whether or not a new project is a legitimate investment opportunity.
1. Use block explorers
Tools like BSC Scan and Etherscan allow you to look up a token's address and access crucial data such as the number of holders and transactions. Keep an eye out for these possible signs:
Most tokens are held by one or a few wallets.
Developers withdraw funds from the liquidity pool.
A sudden flow of tokens from the project's wallet address to an exchange platform.
Etherscan screenshot
2. Use other online tools
Don't just rely on a block explorer when doing your research. Rug Doc is an online tool that analyzes project code to detect possible fraud. Any tokens that present possible risks are reported on the website and scored according to the risk level. Token Sniffer is another useful tool that audits tokens by analyzing their liquidity, contracts, and any similarities to other fraudulent projects.
Rug DOC screenshot
Disclaimer: While using these tools can be helpful in researching the legitimacy of a token, it is important to remember that nothing is guaranteed when it comes to investing. Always conduct your research (DYOR) and manage your risk accordingly when making investment decisions.
If you have been the victim of a rug pull
Withdraw your money. If it is still possible, withdraw your money as soon as you can. This can prevent further losses.
Stop investing. Do not invest more funds in the project. They may try to trick you into thinking the project is real, even after they have been exposed.
Report the project. If you have been approached or found the project on social media, please report the profile to the relevant moderation team.
Immediately file a report by following the steps in this guide: How to report scams to Binance support. Contact the responsible authorities and provide all necessary details. Share all the information you have collected, including evidence of any interactions with the scammer. Binance works closely with law enforcement authorities, and our cooperation regularly results in detections and seizures. Although recovery of your money is far from guaranteed, this is, in most cases, the only chance to recover stolen funds.
Further reading
Discover the Scams: fake investments in cryptocurrencies to keep an eye on
Know the Scams: alerts to identify an impostor scam
Know the Scams: job opportunity scams to watch out for
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