Spotting a Bait & Switch Scam
We’ll tell you about a scam that has been targeting people in the shitcoin community.
What is a rug pull and how do I protect myself?
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:
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:
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:
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!
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!