Rug pull is a type of scam where a group of developers or creators of a cryptocurrency project will inflate the value of their token before dumping their holdings at a high price or draining its liquidity.
Withdrawal activity mainly occurs in one of three ways: token dumping, liquidity theft, and issuance of unsellable tokens.
Are you a victim of a rug pull? Please report the incident immediately to the relevant law enforcement agency and Binance Support team.
Learn about common signs of carpet-pulling and how to protect yourself in today's edition of Know Your Scam.
What are the three types of carpet pulling?
While all rug pulls follow the same logic of increasing the value of the token and taking away investors' money, there are a few ways they can differ in execution. Here are the three most common types of rug pulls that you, as a crypto investor, may encounter.
1. Create an attractive token and dump
Scammers create tokens with fake value, convincing investors of high returns while holding the majority of the tokens. When the price reaches a certain level, the "project team" sells all their tokens, causing the price to crash.
2. Stealing liquidity
Cryptocurrency projects on decentralized exchanges need a liquidity pool – a large amount of money locked in a smart contract – to be able to trade. Scammers will lure early investors into contributing to the liquidity pool before draining all the money in it.
3. Create a non-saleable token
This method involves a simple coding trick that, when activated, blocks investors from selling their tokens. Once enough retail investors buy the tokens, the “project team” activates the code and sells their positions.
How the Rug Pull Scam Works in Crypto
Here's a closer look at the common steps you'll see in every type of rug pull scam.
1. Create an engaging project
Scammers start by launching a new cryptocurrency project and attracting potential investors through social media platforms like Twitter, Instagram, or Discord. They often promise high returns and use flashy marketing tactics to create hype around their token.
2. Camouflage and decoy
As investors start contributing money, scammers try to create the illusion of progress. They may release updates, list tokens on exchanges, or claim partnerships with reputable companies. These partnerships are often fabricated or have no real value. Their efforts are often just smoke and mirrors to attract more investors and drive up the price of the token.
3. Pull the carpet
The token reaches a certain price or, in the case of a liquidity pool drain, attracts a certain amount of money. The scammers execute their plan and abandon the project, taking all the money with them. Investors are left with worthless tokens and often no way to get their money back.
How to Research Cryptocurrency Projects to Avoid Scams Rug Pull
One of the golden rules of investing: always do your research before investing your money in anything. Here are some useful tools to help you check whether a new project is a legitimate investment opportunity.
1. Use block explorer
Tools like BSC Scan and Etherscan allow you to search for token addresses and access important data, such as the number of holders and transactions. Look out for the following potential signs:
The majority of tokens are held by one or a few wallets.
Developers have withdrawn funds from the liquidity pool.
A large amount of tokens were suddenly transferred from the project's wallet address to the exchange platform.
2. Use other online tools
Don’t rely solely on a block explorer when doing your research. Rug Doc is an online tool that analyzes the code of projects to detect potential scams. Any risky tokens they find are reported on their website and scored according to their risk level. Token Sniffer is another useful tool for vetting tokens by analyzing liquidity, contracts, and any similarities to other scam projects.
If you are a victim of rug pulling
Withdraw your money. If you still can, withdraw your money as soon as possible. This may prevent further losses.
Stop investing. Don't invest any more money into the project. They may try to trick you into thinking the project is real even after they've been caught.
Report the project. If you are approached or find the project on social media, please report the profile to the relevant moderation team.
File a report immediately by following the steps outlined in this guide: How to Report a Scam on Binance Support . Contact law enforcement and provide all the necessary information. Share any information you have collected, including evidence of any interactions with the scammer. Binance works closely with law enforcement, and our cooperation often leads to detection and seizure. While recovery of your funds is not guaranteed, in most cases this is your only chance of recovering stolen funds.
