Rug pulls. Scams in the crypto sphere.

If investors want to invest in cryptocurrency, it is important to recognize that it is not without risk. Besides the fact that cryptocurrencies are very volatile, scams also exist. This is where the investor needs to be aware of. One common scam in the crypto sphere - and especially among the lesser-known cryptocurrencies - is the rug pull. What is the rug pull? And how can you avoid getting caught in a rug pull? I'll also provide some tips to do your own research on whether a cryptocurrency is legitimate.

What is a rug pull and how do they work?

The rug pull is a form of scam that starts with the creation of a new cryptocurrency and the hype around this cryptocurrency. After the creation of the cryprocurrency (coin/token), the token will be listed on, say, Pancakeswap and liquidity will be provided by the developers of this cryptocurrency. Once all this is done, the malicious liquidity providers wait for investors to convert their Ethereum (ETH) to this new coin, after which the creators of this cryptocurrency will drain the liquidity pool within minutes, leaving nothing but a worthless coin for the holders of this (rug pulled) coin. 

With each passing day, new coins are appearing on Pancakeswap (a decentralized exchange. Read here about decentralized exchanges and DeFi). To some extent, this was to be expected. New retail investors with no previous experience in the industry are all too eager to spend their ETH on coins that will yield a "10x" or ''100x'' increase in 24 hours. Or at least that's what those paid Twitter accounts or Telegram groups are advertising. A recent rug pull that got a lot of attention is the ''Squid Game coin''. I will discuss this scam in more detail down below. 

What kind of information are important to check?

• Smart contract code?

I know a lot of us are not programmers. For this, you can use some online tools like marketmove.ai or BSCheck.com. On these websites, you can actually see the code and the quality of it. Copy the smart contract code and paste it into this website. It is really easy to use! Please note that this is one of the aspects to check. I do not depend my do your own research DYOR on these websites. Even if the smart contract code looks legit, it doesn't mean that the project in a whole is legit.

Also, check Github. Github performs as a code base hub for new projects. When you search for a project on Github, you should see the (development) activities of the project. If the project is not actively developed, this can be a bad sign.

• Team members?

Always look for the team members on their website. If they are not listed on the website, it is a red flag. Because legit projects have legit and real people behind it. They will show a picture with a LinkedIn account. They also list where they work and you can verify that.

• Website available?

All projects/coins have an own website. Also scam coins have an own website. If there is no website, red flag. Even if there is a website, look how the design is. Most scam coin websites are amateurish (grammar errors etc.).

• Whitepaper available?

If there is no whitepaper available, big red flag. Whitepapers explain the crypto project in detail. Whitepapers also explain the technical details of the coin. If the technical analysis are not there, red flag again. Most scam coins have a whitepaper. But don't be fooled, the whitepapers are mostly a repetition of what they already said on their homepage. Look for technical details!

• Active customer support?

Legit and real crypto projects have people who answer your questions . If they cannot be reached, a red flag. Also, check social media. If you ask critical questions in these social media groups, you mostly will be kicked out the group. If you get kicked out of the group, then that is a big red flag. Also, scammers use bots to interact with holders of the scam coin. 

• Do they make any verifiable claims?

What you often see is that projects claim they have a partnership with Microsoft or another big company. Most of the time, this is not true. They do that to lure people in and to make their crypto project look legit. If they have a partnership with these corporations, these corporations will also endorse that.

• Amount of liquidity the developers own?

Check the amount of liquidity owned by the owner(s) of the project. You can check that by checking the top holders of the token. The first result is usually the burn address, remove that percentage from the total. Next, check the largest holders of the token and their distribution. 

• Take a look at the chart

If the price suddenly skyrockets in value, there is a reason to be concerned. The reason why the price increases in price in such a short time is to get you involved via FOMO (Fear of Missing Out). Always look for the reason behind this sudden surge in value. Is it because the coin is listed? If no material reason can be found, you should be very skeptical. 

• Invest on legitimate exchanges

Another very important aspect is to invest on legitimate exchanges. These exchanges are regulated by local authorities. In the Netherlands, a register of exchanges exist that are regulated by the Dutch authorities (De Nederlandsche bank). The register with regulated exchanges can be found here (also available in English).

• Investor funds locked?

Legitimate projects lock the investors' money for a certain amount of time. The reason to lock the funds of the investors is that it keeps the developers from quickly emptying the pool once it gets to a certain size and leaving the project with the money. A locked pool for a certain amount of time safeguards investors interest. 

These information listed above are the most important aspects to consider when you DYOR in a project/crypto. You have to look at all these points in conjunction and not standalone (also, this is list not limitative).

How do a typical rug pull look like?

1. A malicious developer (or developers) create a coin (let's call it SHIBADOGE) with no real use case. The developer uses the code of another coin and changes a few coding lines.
2. The developer adds liquidity of SHIBADOGE to a DEX such as Uniswap
3. The developer begins to promote the coin through telegram groups and social media, often by paying influencers.
4. After that, the price of the token rises, promises incredible returns, and FOMO causes users to add coins with real value (mostly ETH) to the liquidity pool (to buy SHIBADOGE), causing users to buy SHIBADOGE directly, driving the price up even further. 
5. If the developer is satisfied with the earnings, the developer of SHIBADOGE drains all liquidity from the platform and exits with the valuable tokens (ETH). Investors who did not sell early are left holding worthless tokens.
6. The holders of SHIBADOGE cannot cash out their coins because the liquidity pool is drained. The developers ran with the valuable coins (ETH). 
7. The developers can repeat this scam again and again, under a new coin and pseudonym. 

Squid game coin rug pull

The squid game coin is a coin that received a lot of media attention. Several media outlets reported this coin, including CNBC and BBC. Because many media outlets reported on this coin (and because the show is popular), more and more people began to invest money in this coin. The only way to buy this coin was through Pancakeswap. Pancakeswap is a decentralized exchange (DEX) where you can buy coins by exchanging another coin. What you had to do is exchange your BNB (Binance coin) to Squid game coin. Pancakeswap only provides a user interface and is not responsible for the transactions and coins on the DEX.

The SQUID cryptocurrency peaked at a price of $2,861 before plummeting to $0 around 5:40 a.m. ET., according to the website CoinMarketCap. The developers ran with $3.4 million of investors funds. There are multiple reports that people lost their life savings. 

There were many red flags regarding this coin:

• Grammar errors on their website;

• Team members do not exist (pictures were used from the website https://thispersondoesnotexist.com/);

• Claims they didn't back up;

• Fake partnerships with Microsoft etc.

• Investors' funds are locked due to the anti pump and dump mechanism (investors couldn't sell). They did not elaborate why and how the mechanism works. No technical background provided.

• No technical background provided in general for their project.

• The whitepaper changed a few times.

• No customer support. It was a bot.

• Social media channels were taken offline.

• Coinmarketcap.com issued a warning that investors should be cautious.