Last October, a rug pull devastated investors eager to make money from cryptocurrency token “SQUID,” named after the popular Netflix show Squid Game.
With its bandwagon hype, the token’s value skyrocketed by a whopping 23,000,000% to $2,862 within a week. It took less than five minutes though before the value rapidly plummeted to $0.0007926 as the developers embezzle almost $3.4 million from their investors.
The SQUID scam is now a cautionary tale for many crypto enthusiasts as rug pulls of the same kind are becoming greater in number.
What’s A Rug Pull?
A “rug pull” refers to a cryptocurrency scam in which developers abandon a project and run away with investor money.
Initially, developers will launch a project which looks legitimate and has a lot of potential – from social media presence, advertisement, and documents. Once they’ve gained the trust of investors and the general project, they will pool the investment fund, banking on bandwagon hype. The next thing you know, they go incommunicado and abandon the project. Goodbye, money.
Related Reading | Propelled By Rug Pulls, Crypto Scams Rise 81% In 2021
Below, we listed five ways you can spot a rug pull and save yourself from losing your hard-earned moolah.
1. Check The Profile Of Developers
First and foremost, potential crypto investors must check on the credibility of the people behind the projects.
Do the developers have a track record in the crypto community? Is the development team composed of reliable crypto programmers? Is the quality of the project’s whitepaper, website, and advertisements dependable? In other words – are they legit?
Stay away from anonymous developers since projects like these involve hefty amounts of money.
2. Examine The Liquidity Locked
After checking for the project creators’ profile, look if the crypto currency is liquidity locked.
Liquidity is locked through smart contracts, which usually spans up to five years from the token’s initial bidding. While some personally script time locks, third-party lockers are usually hired to ascertain clients of the project’s legitimacy.
Without the lock on the token supply, developers can easily run away from the investment, leaving no trace behind.
Total crypto market cap at $1.93 trillion in the daily chart | Source: TradingView.com
3. Beware Of Sketchy High Yields
If something sounds too unrealistically profitable, just trust your instincts. If it’s not a rug pull, then it’s likely a Ponzi scheme.
As in every investment, high yields translate to high risk. An annual percentage yield (APY) beyond the hundreds does not automatically mean that it’s a scam, but you should be cautious of them.
4. Limits On Sell Orders
Scammers usually code a crypto to put a cap on the selling capacity of selected investors. Selling limits are usually buried in obscure code, so it is not the easiest to identify one.
To figure this out, try to purchase a small amount of the new token and then attempt to sell it right after. If there is a limit, it’s a scam.
5. No External Audit
All cryptocurrency projects are required to formally submit an audit process conducted by an independent third party to prove their legitimacy.
Aside from finance, code audits must check the contract for hidden terms or scrappy security features.
Be Smart, Keep Safe
Be careful when investing on cryptocurrency. We’ve all heard what the sages have always said about something being “too good to be true.”
Related Reading | Binance CEO Changpeng Zhao Warns Users Of SMS Phishing Scam
Image from Coinfomania, chart from TradingView.com