The cryptocurrency space is a dynamic, exciting, and opportunity-rich environment. However, for every genuine project that promises cutting-edge technology and financial independence, there are others that aim to defraud gullible investors, particularly those who are new to the market. The rug pull is among the most well-known cryptocurrency scams.
Knowing what a rug pull is, how it operates, and how to avoid it is essential if you're new to the cryptocurrency world in order to safeguard your finances and mental health. Everything you need to know to recognize warning signs, safeguard yourself, and make prudent investments in a decentralized world will be covered in this guide.
What Is a Rug Pull?
In the cryptocurrency and DeFi (decentralized finance) ecosystem, a rug pull is a scam in which developers abruptly stop working on a project and steal investors' money.
The phrase "pulling the rug out from under someone," which refers to abruptly removing support, is where the term originates. This occurs in a crypto rug pull when:
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A token is launched with hype and promises
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Investors buy in and drive up the price
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The developers sell all their tokens or drain liquidity pools
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The token value crashes to zero, leaving buyers with worthless assets
Rug pulls have happened across DeFi, NFT platforms, and even play-to-earn (P2E) games.
Why Are Rug Pulls So Common in Crypto?
Several factors make the crypto space fertile ground for rug pulls:
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Lack of Regulation: Numerous cryptocurrency platforms, including DeFi, are unregulated. Projects with fictitious teams and no accountability can be started by scammers.
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Hype-Driven Markets: Investors often buy tokens based on trends or influencers without doing research.
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Ease of Token Creation: Anyone can create a token on networks like Ethereum or Binance Smart Chain in minutes.
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Anonymity: Developers can hide behind pseudonyms, fake profiles, and untraceable wallets.
Types of Rug Pulls
There are two major categories: hard rug pulls and soft rug pulls.
🔴 Hard Rug Pulls
These are outright scams where developers design malicious code or tokenomics from the beginning.
Examples:
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Liquidity pool is drained after users invest.
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Tokens have built-in functions allowing unlimited minting.
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Smart contracts prevent users from selling.
🟠 Soft Rug Pulls
These are still dishonest but less obvious. After raising funds, developers may decide to drop the project or gradually dump their tokens.
Examples:
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The team stops updating the roadmap after launch.
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Founders sell off large portions of tokens ("dev dumps").
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Promised features or utilities never materialize.
Real-Life Examples of Rug Pulls
1. Squid Game Token (SQUID)
Motivated by the Netflix series, this token went viral and experienced a rapid increase of over 75,000% in a matter of days. Users found, however, that they were unable to sell their tokens. The token eventually plummeted to almost nothing, and the developers vanished with more than $3 million.
2. AnubisDAO
Through a token sale, AnubisDAO raised almost $60 million in Ethereum, positioning itself as a DeFi project akin to Dogecoin. The creators disappeared after the money was taken out of the liquidity pool in less than a day.
3. Fegex or Sushiswap Forks
Some forked projects and clone tokens from well-known protocols look legitimate, but they are actually made by dishonest actors for pump-and-dump schemes.
How to Spot a Rug Pull: Red Flags to Watch
While not foolproof, there are signs that can help you spot potential rug pulls before investing:
1. 🚩 Anonymous or Fake Teams
Investigate the development team at all times. Can their identities be confirmed? Do they have GitHub contributions, previous projects, or LinkedIn profiles?
Red Flags:
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No real names, only avatars
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Stock photos or AI-generated images
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No history in blockchain development
2. 🚩 No Audit or Code Transparency
A project’s smart contracts should be publicly available and ideally audited by a trusted firm like CertiK or SlowMist.
Red Flags:
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Closed-source contracts
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No audits or unverifiable ones
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Suspicious permissions like owner-only minting or transferring rights
3. 🚩 Unlocked Liquidity
In order to demonstrate that they are unable to rug the pool, legitimate projects use third-party services (like Unicrypt and DxLock) to lock liquidity for a predetermined amount of time.
Red Flags:
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No proof of liquidity lock
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Liquidity provider tokens held in dev wallets
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Sudden removal of liquidity
4. 🚩 Tokenomics That Favor Devs
Check the token distribution:
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How much does the team hold?
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Is there a vesting schedule?
Red Flags:
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Over 50% of supply held by a single wallet
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No locking or vesting for the dev team
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No transparency about allocations
5. 🚩 Unrealistic Promises and Hype
If it sounds too good to be true—it probably is.
Red Flags:
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Guaranteed returns or passive income
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“Next 100x” marketing claims
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Fake endorsements or fake followers on Twitter/Telegram
6. 🚩 Poor or Copy-Paste Whitepapers
A quality project should have a clear, detailed whitepaper that explains goals, tokenomics, and roadmap.
Red Flags:
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Plagiarized content
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Vague or missing sections
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Unrealistic timelines with no technical details
Tools to Help You Stay Safe
Here are some platforms and tools that can help you analyze projects and avoid rug pulls:
🔍 Token Scanners
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TokenSniffer.com: Checks for common scam contract patterns.
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DEXTools.io: Analyze liquidity, trading activity, and holders.
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RugDoc.io: Community-driven audit and safety reviews for BSC projects.
🧠 Wallet Analysis
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BSCScan / Etherscan: View token holders and transaction history.
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Nansen.ai: Tracks wallet behavior and identifies smart money vs. spam wallets.
🛡️ Audit Platforms
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CertiK.com: Leading blockchain audit firm.
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SlowMist.io: Provides smart contract audits and threat intelligence.
Best Practices for New Investors
Avoiding rug pulls involves more than just identifying warning signs; it also entails developing positive habits and remaining skeptical. The following advice is for all newcomers to cryptocurrency:
✅ 1. Do Your Own Research (DYOR)
Never invest based solely on a YouTube video, influencer tweet, or Reddit hype. Spend time reading:
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The whitepaper
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Team bios
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Smart contract audits
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Social media engagement (real vs. bots)
✅ 2. Use Small Amounts First
If you’re unsure about a project, start with a small investment. Test withdrawals and token sales before going all in.
✅ 3. Don’t Chase Every Pump
FOMO (Fear of Missing Out) is what scammers rely on. Be patient and choose quality over hype.
✅ 4. Stick to Reputable Exchanges
For initial investments, use audited DEXs (Uniswap, Sushiswap) or centralized exchanges (Coinbase, Kraken). Steer clear of obscure swaps with no track record of liquidity.
✅ 5. Avoid Private DMs and Airdrop Scams
Never click on unsolicited messages in Telegram or Discord that ask for wallet access or claim to have "won an airdrop."
What to Do If You’ve Been Rugged
Unfortunately, if you fall victim to a rug pull, there’s usually no way to recover your funds. But here are steps you can take:
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Report the Scam: Notify your local financial authority and platforms like CoinGecko, CoinMarketCap, and Etherscan.
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Warn Others: Leave reviews and alert the crypto community to avoid the same trap.
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Review Your Wallet: Revoke approvals using tools like Revoke.cash.
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Learn from the Experience: Treat it as a learning opportunity and refine your vetting process.
Final Thoughts
Crypto presents both new risks and previously unheard-of opportunities. Knowledge is your most potent weapon as a novice. Rug pulls may occur frequently, but they can be prevented if you:
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Stay skeptical
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Use reliable tools
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Trust your instincts
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Never risk more than you can afford to lose
Crypto is more akin to a digital jungle than the Wild West. One of the many traps is rug pulls. However, you can safely navigate it and emerge stronger, wiser, and more profitable if you have the correct attitude and resources.
Stay sharp. Stay skeptical. And never forget—if it sounds too good to be true, it probably is.
