What is a rug pull scam?
The rug pull consists of launching a new cryptocurrency project and creating hype around its cryptocurrency. Criminals spread false information to inflate the price of their new cryptocurrency.
Once the liquidity reaches a certain amount, they sell all their tokens in a DEX like Uniswap Where Pancake Swap and abandon the project. This leaves unfortunate investors with purchased tokens that are worth next to nothing.
A recent uplifting story chronicles the experience of several investors who purchased a cryptocurrency called Squid Game (SQUID). The value of the SQUID soared and then crashed. The developers reportedly resold their tokens taking the equivalent of $3 million from investors.
In January, a class action lawsuit was filed, accusing Kim Kardashian and boxer Floyd Mayweather of having artificially inflated the price of Ethereum Max, a cryptocurrency that took advantage of the success from Ethereum. It looks like the devs have made a rug pull.
How to avoid falling into the trap of the rug pull?
Criminals often take advantage of the emotional aspect of trading. They make investors believe that they are about to miss a big opportunity to get rich. If we think only of gains, we risk being wrong.
But taking a step back, we can easily analyze the project in question. You should inquire about the following points.
- The objective: is there a real platform that will be developed, what problems are the developers trying to solve?
- The background of the developers: are they well known or have they participated in other projects?
- The community: is it interested in the platform, or is it just looking to get rich?
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By asking yourself these questions, you will be able to filter out perhaps 95% of rug pulls. But that is not enough !
Apply risk management (crypto money management)
Rather than investing all your capital on one project, you should limit your stake per project. For example, you will invest 1 to 5% of your investment capital per project. Thus, even if you come across a rug pull, you will not lose a large part of your capital at once.
At the same time, to familiarize yourself with the different projects and platforms, you can bet on a small amount of less than 10 euros as a test.