Know Your Scam: How to Avoid and Report Crypto Rug Pull Scams
Main Takeaways
Rug pulls are a type of scam where a team of crypto project’s developers or creators pumps up their token’s value before dumping their holdings at an inflated price or extracting its liquidity.
Rug pulls primarily happen in one of three ways: token dumps, liquidity theft, and issuing unsellable tokens.
Have you fallen victim to a rug pull? Report the incident immediately to the relevant law enforcement agency and the Binance Support team.
Learn about the common signs of a rug pull and how to protect yourself in today’s edition of Know Your Scam.
Rug pull is a scheme common in crypto where scammers create a fraudulent token, drive up its value to attract buyers, and then run off with the investors’ money after the token reaches a peak price. These scams can be devastating for cryptocurrency investors, leaving them with essentially worthless assets.
This edition of Know Your Scam will explore how these scams work and equip you with some essential tools to spot and avoid these schemes. Before we take a closer look at how these scams work, it’s important to understand the three main types of rug pulls.
Interested in learning more about other crypto scams? Find our full series of articles here.
What Are the Three Types of Rug Pulls
While all rug pulls follow the same logic of driving up a token’s value 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 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 a majority of the tokens. Once the price reaches a certain point, the “project team” sells all their tokens, causing the price to crash.
2. Steal liquidity
Crypto projects on decentralized exchanges need a liquidity pool – a large pot of funds locked in a smart contract – to become tradeable. Scammers will lure early investors to contribute to the liquidity pool before withdrawing all the funds within.
3. Create a token that can’t be sold
This method involves a simple coding trick that, upon activation, blocks investors from selling their tokens. After enough retail investors buy the token, the “project team” activates the code and dumps their positions.
How Rug Pull Scams Work in Crypto
Here’s a closer look into the common steps you’ll see across all types of rug pull scams.
1. Creating an attractive project
The scammers start by launching a new crypto project and enticing potential investors through social media platforms like Twitter, Instagram, or Discord. They often promise high returns and use flashy marketing tactics to build hype around their token.
2. Disguising and baiting
Once investors start contributing funds, scammers try to create the illusion of progress. They may release updates, list the token on exchanges, or claim partnerships with reputable companies. These partnerships are often fabricated or have no real value. All of their efforts are usually just smoke and mirrors to attract more investors and drive up the token’s price.
3. The rug pull
The token reaches a certain price or, in the case of a liquidity pool rug pull, attracts a certain amount of funds. The scammers execute their plan and abandon the project, taking all the funds with them. Investors are left with worthless tokens and, more often than not, no way to recover their money.
Interested in learning more about other crypto scams? Find our full series of articles here.
How to Research Crypto Projects to Avoid a Rug Pull Scam
One of the golden rules of investing: always do your research before putting money into anything. Here are some useful tools to help you check whether or not a new project is a legitimate investment opportunity.
1. Use block explorers
Tools like BSC Scan and Etherscan allow you to search for a token's address and access crucial data, such as the number of holders and transactions. Look out for these potential signs:
The majority of tokens are held by one or a few wallets.
The developers have withdrawn funds from the liquidity pool.
A sudden influx of tokens from the project’s wallet address to an exchange platform.
Screenshot of Etherscan
2. Use other online tools
Don’t solely rely on a block explorer when doing your research. Rug Doc is an online tool that analyzes projects’ code to detect potential scams. Any risky tokens they find are reported on their website and scored according to the level of risk. Token Sniffer is another helpful tool that audits tokens by analyzing their liquidity, contracts, and any similarities to other scam projects.
Screenshot of Rug DOC
Disclaimer: While using these tools can be helpful in researching a token's legitimacy, it’s important to remember that nothing is guaranteed when it comes to investing. Always conduct your research (DYOR) and manage your risk accordingly when making investment decisions.
If You’ve Fallen Victim to a Rug Pull
Withdraw your money. If it’s still possible, withdraw your money as soon as you can. This can prevent further losses.
Stop investing. Don’t invest any more funds into the project. They may try to trick you into thinking the project is real even after they’ve been exposed.
Report the project. If you were approached or found the project on social media, report the profile to the relevant moderation team.
Immediately file a report by following the steps outlined in this guide: How to Report Scams on Binance Support. Contact law enforcement and provide all the necessary details. Share all the information you have gathered, including evidence of any interaction with the scammer. Binance works closely with law enforcement, and our cooperation regularly results in detections and seizures. While recovering your money is far from guaranteed, this is, in most cases, the only chance to retrieve the stolen funds.
Further Reading
Disclaimer and Risk Warning: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use and Risk Warning.