Rug Pulls Explained: How to Spot a Crypto Scam Before It’s Too Late

What is a rug pull, and why is it becoming such a major concern for crypto investors? If you’re keen to avoid becoming the next crypto rug pull victim, we’re about to tell you everything you need to know. 

The crypto world is exciting – packed with opportunities to earn money, explore new projects, and stock up on unique assets. But industry experts aren’t just fear-mongering when they say this space is volatile and unpredictable. There are a lot of risks out there – like the notorious crypto rug pull.

In 2021, rug pulls accounted for about 37% of all digital asset scam revenue. Basically, with rug pulls, developers roll out a shiny new token, hype it up to draw in backers, then vanish with the capital (pulling the rug from under your feet).

It all sounds pretty daunting – but don’t worry. Here, we’ll give you the know-how you need to spot suspicious projects early – so you can protect your finances. 

What Is Rug Pulling in Crypto? The Basics

A crypto rug pull is pretty much exactly what it sounds like – a scam that essentially yanks opportunities out from under your feet (as well as snatching up your hard-earned cash). Simply put, developers create cryptocurrency projects that seem legitimate on the surface, and start charging up hype, drawing investors into their trap. 

Once they collect enough capital, these developers abandon the project, leaving the token worthless, and vanishing from sight. Think of it like this. Imagine you’ve gone to a fair, and you’re attracted to a booth where everyone seems to be winning and grabbing great prizes. 

You go over, pay your entry fee, and as soon as you’re about to claim a prize, the booth owner disappears – you’ve been rugpulled. 

Unfortunately, these scams are pretty common in the cryptocurrency space, particularly in the worlds of DeFi, NFTs, and meme coins – where hype can be generated fast. 

If you need examples, there are plenty out there. For instance, the Squid Game Token leveraged the buzz of the Netflix series “Squid Game” to build a play-to-earn project. But, the developers then coded in anti-sell mechanisms, preventing investors from selling, and eventually disappeared with more than $3 million in investments.

Another popular example is AnubisDAO. Billed as an innovative DeFi project, AnubisDAO raised close to $60 million in mere hours. In under 24 hours, all that money vanished from its liquidity pool, and every trace of the project was scrubbed from the internet.

The Thodex rug pull is another big hitter. Here, a Turkish crypto exchange abruptly shut down, and the founder disappeared with more than $2 billion in investor funds. 

The Crypto Rug Pull: Common Types 

One of the things that makes crypto rug pulls so difficult to identify – is they don’t always follow the same playbook. Some are swift and obvious, others happen in slow motion – with scammers that really do seem legitimate, until it’s too late. So let’s look at some of the common types:

• Hard Rug Pulls: Hard rug pulls are what happen when developers intend to scam their investors from day one. They insert malicious code, like a hidden backdoor in a smart contract, into their project to intentionally steal funds, mint unlimited tokens, or drain liquidity pools instantly. These events are usually illegal – and they happen fast. 

• Soft Rug Pulls: Soft pulls are technically legal – but they’re unethical. Developers act like they’re building a legitimate project (and they might be initially), but then they slowly abandon it, stop delivering updates, or dump massive amounts of tokens – tanking the price. While investors are left holding the bag, the creators often walk away unscathed. Think of it as a slow fade instead of a smash-and-grab.

• Liquidity removal: In the DeFi space, most projects rely on liquidity pools for trading. Scammers, however, can “pull” their share of liquidity from the pool, causing the token’s value to plummet in seconds. The remaining tokens become worthless because nobody can trade or sell them at any real price.

• Exit Scams: This is the classic crypto rug pull - developers launch a project with flashy websites, whitepapers, and social media hype. Once they've raised enough from unsuspecting investors, they shut everything down – socials, websites, and token contracts. They just disappear into thin air, leaving investors with nothing.

How to Spot a Rug Pull Before Investing

So, how do you spot a crypto rug pull, before it tanks your finances? Ultimately, it’s all about prioritizing research and due diligence – and making sure you don’t get swept away by the hype. 

Start by looking for red flags in the actual crypto project:

• Anonymous Team: In DeFi, people like anonymity, but developers shouldn’t be hidden. If the people behind a team are basically ghosts, that’s a huge red flag. Look for a transparent, team of well-known developers, with credible backgrounds. 

• Unrealistic Promises: If it seems too good to be true – it is. Be wary of projects that “guarantee returns” or rave about earnings that look almost impossible. No legitimate project will be able to promise you anything. Big promises are usually just bait designed to lure unsuspecting victims to fake projects.

• No audits: Smart projects are crucial in crypto projects – but they can also cause a lot of problems if they have bugs or coding errors. Reputable developers get their contracts audited by reputable firms like CertiK. If those audits aren’t available for your project, be cautious. Never assume a project is safe because it “looks professional”. 

• Locked Liquidity: In many DeFi projects, developers are expected to lock liquidity for a certain period using services like Unicrypt. If liquidity isn’t locked, then developers can pull it and run. Make sure the token in question has some form of locked liquidity - it’s an extra barrier against quick exits.

• Social Media and Community: A project with fake followers (inflated social media counts but no real engagement) is suspicious. Watch for projects with social media accounts that have virtually no engagement, or where discussions have been censored (people deleting comments). This is a huge red flag. 

Technical Checks to Consider

Beyond looking at the project closely, it’s a good idea to run a few technical checks too – just like you would if you were investing in any other asset. The main things to focus on include:

Token Distribution

A healthy (balanced) token distribution ensures that no single entity holds a ridiculous amount of the total supply. If a few wallets control a significant percentage, they can manipulate the market by dumping their holdings. That has a negative impact on the token’s price. Tools like Etherscan or BscScan can show you these details before you invest. 

Renounced Ownership

If developers have renounced ownership of the smart contract, they no longer have the power to tweak critical aspects of the token. This can be a good sign that they can’t suddenly add malicious functions or mint extra tokens. But total renouncement can sometimes hamper future development if legitimate updates are needed. Look for a balance.

Transaction History

Examining how tokens have moved over time can reveal suspicious patterns, like big developer sell-offs right after launch. Large, early transactions to unknown wallets are also a sign that someone might be siphoning funds. Again, Etherscan, BscScan, or similar blockchain explorers are going to be helpful here. 

How to Protect Yourself from Crypto Rug Pulls

Knowing how to spot obvious red flags is important – but it’s only half the battle. You also need to take a proactive approach to defend yourself against being rugpulled. 

The best advice?

Do Your Own Research: 

It sounds cliché, but doing due diligence is still the best way to avoid scams. Don’t just read the project’s whitepaper - verify that it actually aligns with the token’s real-world functionality. Look for LinkedIn profiles or established credentials. A credible team often has a track record in the industry. Check out what independent voices on Twitter, Telegram, Discord, or Reddit are saying. Are people’s questions being answered honestly, or are they being ignored or censored?

Don’t Invest Too Much: 

In fact, only invest what you can actually afford to use. The crypto world is volatile, and even legitimate projects can flop. Never sink money into a new token or NFT if you can’t afford to lose it. Approach every investment opportunity with a clear understanding of what happens if the “worst case scenario” occurs.

Use Trusted Platforms: 

Stick with well-known decentralized exchanges (DEXs) that have a track record of listing credible projects. Look for audited projects—audits from firms like CertiK or PeckShield don’t guarantee safety but do add a layer of accountability. Consider platforms like Flipster, which emphasizes security and lists only vetted assets, providing an extra buffer of reassurance.

Follow Rug Pull Trackers and Security Sites

Keep tabs on scam alerts using tools like RugDoc and DeFiSafety. These platforms evaluate the safety and transparency of DeFi protocols, flagging risky projects and shady behavior in real time. They often track suspicious activity, warn users about high-risk tokens, and publish in-depth safety reviews. Staying updated with their alerts can keep you one step ahead of emerging scams.

What to Do If You’ve Been Rugged?

The best cure is prevention – but if you’ve already been rugged, don’t just lament your lost cash. Even if your money’s gone, you can still:

• Report the Scam: Head to a community-driven scam reporting platform like Chainabuse to flag the fraudulent project. In the United States, consider filing a report with the Securities and Exchange Commission (SEC) or the Federal Trade Commission (FTC). If you’re in another country, look for the equivalent financial authority. While recovering funds is rare, every report adds to a database of intelligence that could prevent future victims.

• Warn Others: Post on social media platforms like Twitter, relevant Reddit threads (e.g., r/CryptoCurrency), or any Telegram/Discord channels associated with the project. Be concise, factual, and transparent. Include details such as the token contract address, timelines of suspicious activity, and what exactly happened. Do your best to prevent others from falling victim to the same scams. 

• Learn from the Experience: A rug pull is a punch to the gut, but it can be a strong learning experience. Reflect on the red flags you might’ve overlooked. Did you jump in because of hype? Did you neglect to verify the team or check the liquidity lock? Adjust your future strategy, refine your research process, and don’t let one misstep push you out of crypto forever. Many successful investors have at least one story about being scammed before they learned to be more vigilant.

Stay Smart and Safe in Crypto

Crypto rug pulls can be devastating – but they’re also avoidable (most of the time), if you know what to look for. Staying alert, informed, and vigilant about searching for red flags can help you take a more cautious approach to crypto investing, and avoid some major losses. 

A healthy dose of skepticism isn’t a bad thing in the crypto world. Keeping your critical thinking engaged is how you differentiate from legitimate opportunities and hype-powered ruses. 

Remember, the real value of cryptocurrency is in its long-term utility and adoption, not in overnight fortunes. Approach every new project with a combination of curiosity and caution. When in doubt, trust your instincts: it’s better to miss a hype train than to lose your entire investment in a scam.

Ultimately, as is often the case in life, in crypto: if it seems too good to be true, it probably is.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.