Key Insights

• Rug pulls are particularly common with meme coins where price action is dependent on hype.

• There are three major kinds of rug pulls including liquidity, token dumps and backdoor code exploits.

• It likely is if something seems too good to be true in the crypto space.

• Remember to do your research before investing in any project.

The crypto world, despite being highly lucrative is home to some of the harshest financial scams in the world.

One of the biggest classes of crypto scams, in this case, is rug pulls.

Rug pulls (also known as rugging) are exactly what their name implies. They happen when the developers of a project suddenly withdraw all their funds.

This tanks the value of the general crypto in everyone else’s wallets and leaves investors with worthless or semi-worthless tokens. 

In 2024 alone, there have been countless memecoin rug pulls on even celebrity-endorsed memecoins.

These happened particularly on the Solana Network. 

As the crypto space continues to grow, everyone needs to understand how this scam type works and how to avoid it.

Understanding Rug Pulls in Crypto

Rug pulls happen when the creators of a project suddenly vanish after collecting investors’ money.

In many cases, the project receives a lot of hype with unreasonable promises and even some celebrity endorsements here and there.

These tactics attract a large number of investors who jump in and throw money into the pot.

Once a good amount of capital has been collected, the developers simply “pull the rug out” from under everyone else by selling their holdings and crashing the price.

These scams are more common in defi and memecoin projects—which makes sense because they are often less regulated and easier to manipulate. 

Many developers in the crypto space are often anonymous. This makes it difficult to hold rug-pull perpetrators accountable when they strike.

How Rug Pulls Work

In the crypto space, Rug pulls usually happen in three main ways. Here they are:

1. Liquidity Rug Pulls

In this form of rug pull, developers provide the initial liquidity for the scam token on a DEX like Uniswap or PancakeSwap. 

They then wait for enough investors to buy the token. As soon as the coin’s market cap hits a certain threshold, they withdraw the liquidity pool.

This leaves investors unable to sell their tokens. The price of the asset collapses and the scammers walk away with funds.

2. Token Dumping

This is the most common form of rugging. A project’s developers hold a large part of the token’s supply.

They then hype it up through aggressive marketing and get investors to buy.

Soon after, they dump their holdings on the market and cause prices to plummet.

This is especially common with memecoins where value is primarily driven by hype.

3. Backdoor Coding Exploits

This type of scam is more difficult to pull off than the other two. The scammers who exploit using backdoors typically have extensive coding knowledge.

They simply embed hidden code that allows them to mint more tokens or even drain the liquidity pool without investors knowing. 

Once the scam is in place and investors have bought in en masse, they use this exploit to drain all the assets from the project.

How to Spot a Possible Rug Pull

All of the above implies that knowing how to spot a rug pull is important. Here are some of the most common red flags to be aware of.

1. Anonymous or Unverified Developers

This is arguably one of the biggest and most common signs. When a project has anonymous developers or teams that cannot be easily verified or traced, it might be a good idea to steer clear.

It is a major red flag if you can’t find a credible source of information on who is running things.

2. Unusually High Returns Promised

There is no such thing as “guaranteed returns”. If a project promises extremely high profits in a short amount of time, it is likely too good to be true. 

Scammers often attempt to tap into the greed of investors. They do this knowing that the excitement of getting rich will blind most people to the risks.

3. No Locking or Auditing of Liquidity

This is another major red flag. Legitimate projects often lock their liquidity for a specific period or have it audited by third parties. 

This makes sure that the developers can’t suddenly withdraw funds. If a project doesn’t have these measures in place—it just might be a rug pull.

4. Sudden and Aggressive Marketing

Avoid projects when influencers suddenly start to jump in and hype it. This is especially true when these influencers have zero connection to the project.

An athlete or actor suddenly promoting a completely unrelated token can be a sign of a pump-and-dump scheme. 

Marketing is one of the biggest tools in a scammer’s toolbelt when it comes to building excitement before exiting with the funds.

5. No Clear Use Case or Roadmap

Memecoins often thrive on hype alone. However, even this class of crypto assets needs some form of vision or use case at least.

If a project lacks a well-thought-out roadmap—if it doesn’t explain how it intends to grow or maintain its value—it is likely to be a scam.

How to Avoid Meme Coin Rug Pulls

As established, memecoins are a prime target for scammers looking to pull the rug from under investors.

Here are some strategies to help you avoid becoming a victim.

1. Do Your Own Research (DYOR)

Take time to thoroughly research a project before investing. Look for information about the developers, their past projects, and the community behind the token. Also, check if the project has been audited by reputable third parties. 

2. Check Liquidity Locks

Developers can pull funds out at any time if haven’t locked liquidity for a certain period.

Many legit projects lock their liquidity for months or years. Always use platforms like Unicrypt and Team Finance to check before investing.

3. Be Wary of Over-Hyped Projects

Double-check if a project is generating excitement but lacks substance. Remember that it is always better to miss out than be a victim.

4. Diversify Your Investments

Never go all in. This is especially true for memecoins where you need to diversify across multiple projects to reduce the risk of losing everything.

5. Join the Community

Try joining the project’s social media channels and community groups. This helps to gain a sense of how transparent the team is. It also gives you an idea of how engaged the community members are. 

Rug pulls often happen in projects with fake or paid followers. If the community seems overly controlled or aggressive when anyone asks questions, it’s a red flag.

6. Monitor Developer Behavior

Keep an eye on the developers. Are they transparent? Do they communicate with the community? Are they actively working on growth? Ask these questions and pay attention to any Inconsistent or suspicious behavior from the people in charge.

Staying Safe in the Meme Coin Craze

The memecoin craze isn’t going away anytime soon. 

To this end, it is important to conduct thorough research and keep an eye out for the outlined red flags.

#Scam #crypto #rugpull #theft #DYOR