How to Spot a Rug Pull?

What is a Rug Pull?

In the cryptospace, especially in the realm of shitcoins, rug pulls occur when a token’s developer(s) maliciously steals the funds associated with a project, leaving the traders holding “bags” of useless tokens.

Generally, a scammer pulls off a rug pull in a few simple steps:

1. The scammer creates a token.
2. The scammer entices others to buy the token.
3. The scammer crashes the project and gets away with a significant amount of money.
   

How to know if a token will rug pull?

There’s no fool-proof way to predict a rug pull, but many scams tend to share similar tendencies. If you are new to shitcoins, or you don’t know how to read the code of a token’s contract, your next best defense is to try to spot these red flags. 

“if it looks like a duck…and quacks like a duck…it’s probably going to trick you into buying a shitcoin and steal your money”

While crypto scams will happen on all scales, many low-tier scammers don’t invest very much time, money, or energy into their scams. Those who are new to the realm of shitcoins are most likely to fall victim to these small-time con artists. Here is a list of red flags to look for before you jump into any new token, to make sure you’re not their next victim:

• Lacking a Website: Not all projects start with a website, but many that intend to be around a long time do. If the devs of your token haven’t invested in a custom domain for their project, it might be a warning to stay away.
   
• No White Paper: A White Paper is a document that explains the use-case for a token. This is a great way to learn about a project before you spend any money. If you are new to shitcoins, you probably shouldn’t be spending any money on projects that lack a White paper. If a project was properly planned out, the White paper would be made public before the token is made public.
  
  
• Discrepancies Galore: As noted above, many small-time scammers don’t really put much effort into their plot to steal your money; they are prone to overlooking fine details about their project because they expect most buyers to overlook them as well. For example, just because a project might have a White paper and a website, doesn’t mean it’s safe. Part of researching a project is keeping an eye out for discrepancies. Ensure the information on the white paper matches up with the information available on the website. If the team is available to talk on platforms such as Reddit or Telegram, double-check that the information they provide to you is accurate. If a developer can’t answer basic questions about their project, don’t give them your time or money.
  
  
• Quick To Ban: These days, most shitcoin projects have a Discord channel or a Telegram channel (in addition to Twitter, Instagram, and YouTube). If you notice a high number of individuals getting banned or muted, especially when asking the project’s team hard questions, that might be cause for concern. While it is true that all projects will want to silence individuals who are being inappropriate, scammers tend to ban anyone who might foil their scheme. You shouldn’t trust a developer who ducks tough questions. And, especially don’t trust a developer who is silencing individuals with legitimate concerns.
  
  
• Questionable Engagement: Scammers will try to make you believe their project is primed to explode in popularity (and thus, value). Too often, they will use bots or fake accounts to make it seem like their project has a large following. However, faking engagement is much more difficult. Does a Reddit post have 10,000 upvotes, yet only 3–4 comments? The team probably purchased upvotes. Does a Telegram group have 15,000 members, yet only 2–3 people have chatted in the past 24 hours? The team probably filled their Telegram channel with bot accounts.
  

OK, so maybe you think the red flags listed above are obvious; you’d never fall for those types of schemes, right? Well, many people do. Sometimes it’s due to FOMO (Fear of Missing Out); sometimes it’s because they might think they can out-smart the scammer; or, maybe they just let greed surpass their best judgment. Just remember — especially in the crypto world — if it looks like a duck…and quacks like a duck…it’s probably going to trick you into buying a shitcoin and steal your money. Staying away from ducks is just good life advice in general.

The next level of due diligence requires you to use a Token Address and Block Explorer to investigate a potential token before purchase.

Be on the lookout for fake Token Addresses; make sure you are going to a project’s official website or channel to verify it is the correct token address. It will be a series of letters and numbers that look something like this: 0x8076c74c5e3f58520x7f31fx0093eeb8c8add8d3

A Block Explorer is a website that allows individuals to see key information about projects on a particular blockchain (Binance Smart Chain = www.bscscan.com; Matic = www,polygonscan.com; Ethereum = www.etherscan.com)

When you use a Block Explorer to research a token’s contract address, here are some red flags you should look for:

Top Holders With Big Bags

Do a few individuals own high percentages of the total coins in circulation? If so, this could spell trouble! When one individual can crash the price of a token with a few transactions, it makes that token very risky. For reference, at the time of writing this blog post, there were 460 million holders of Bitcoin, with the largest holder owning 1.53% of the total supply. Sure, if someone sold all 1.53% of bitcoin in that wallet, it would cause a cascade of a downward price movement. But, imagine how detrimental it would be if someone sold 20% of all Bitcoin in circulation!

Suspicious Liquidity

And now we finally arrived at the actual “rug” in the phrase “rug pull”. But, what is liquidity, and what do you have to keep an eye on? 

All tokens need liquidity in order to be traded; liquidity allows for a token to be bought or sold without causing a dramatic change in the cost of the token with each transaction. If you’re buying a token on a DEX such as PancakeSwap, the project’s “liquidity pool” will be filled with an initial amount of BNB or BUSD. 

There is no defined amount of liquidity that the project creator “should” put into a liquidity pool, but more likely than not, developers who start a project with low amounts, such as 1–2 BNB, probably aren’t creating “the next big crypto project”. It might be in your best interest to go with projects that are better funded (opinion, not advice).

Yet, your biggest concern about liquidity must be whether or not it is locked (and how long it is locked for). Locked liquidity means that the project owner cannot remove the funds in the liquidity pool for a specific amount of time. Oftentimes, developers will provide proof that liquidity is locked. But, how do you know if they’re lying? Maybe you can ask others in a Telegram group chat if they verified the liquidity is locked…but can you really trust them?

Unfortunately, being able to confirm that a liquidity pool is indeed locked requires a little bit more in-depth training than can be explained in a simple blog post. That is why we at Nexus invite you to complete our mini-course: Checking for Locked Liquidity. This course is brief, informative, free, and coming soon!