What is a crypto rug pull? How to avoid it? Read on to learn more.
As we’ve seen from the rise of initial coin offerings, the blockchain presents a unique opportunity for startups to create their own digital tokens and sell them directly to investors. But with all this new opportunity comes new risks — especially when it comes to investing in new crypto assets.
Unproven projects that claim they have some revolutionary use of blockchain technology are ripe for scammers who are looking to take advantage of inexperienced or greedy investors.
It’s not uncommon for new projects with little-to-no history to launch as an Initial Coin Offering (ICO). In fact, there have been so many ICOs in recent months that many have started calling this whole new subcategory “crypto vogue” (a reference to the late 90s “dot com vogue”).
In this blog post, we’ll cover everything you need to know about crypto rug pulls. We’ll also give you some tips on how you can avoid getting ripped off by unscrupulous ICOs and startups who might be trying to manipulate your greed.
What is a Crypto Rug Pull?
A crypto rug pull is a scam where an ICO creator uses dishonest marketing practices to trick investors into buying their tokens.
One of the most common forms of crypto rug pull is called a “fake roadmap.” This happens when an ICO project puts together a roadmap outlining their future goals and the milestones they plan to achieve along the way. This roadmap is supposed to give potential investors an idea of what the project is trying to accomplish and how much time they have left to do it.
The problem is that there are no rules or laws governing what ICO projects can put on their roadmaps. As long as they have a token sale and publish something online, there’s nothing stopping them from creating fake goals and plugging dates that are far in the future.
And sadly, many dishonest ICOs are taking advantage of this opportunity to trick investors with fake roadmaps that have no real intention of achieving those goals.
What are the various types of rug pulls?
Fake whitepaper
The whitepaper is the founding document of any ICO. It contains all the details of the project, how it will be implemented, and why it is worth investing in. It’s very important that ICOs publish a legitimate and accurate whitepaper to make sure they can’t be accused of fraud. Unfortunately, many ICOs are publishing whitepapers that are completely false or contain misleading information.
Fake token use case
One of the most common ways unscrupulous ICOs trick investors is by claiming their tokens are used for something they aren’t actually intended for. This can happen in any industry. For example, a crypto exchange might claim that their token is actually a decentralized application (dApp) or a utility token that can be used on their own platform.
How to Identify a Crypto Rug Pull?
There’s no definitive way to detect whether or not an ICO is a rug pull. But there are a few tell-tale signs you can use to decide whether or not you should invest in a particular token sale.
If you see any of these red flags, consider skipping the ICO and investing your money elsewhere. The team behind the ICO is anonymous.
- Every legitimate ICO will list their team members and advisors. The fact that an ICO is trying to keep their identity a secret is a huge red flag.
- The ICO lacks a working product. If an ICO doesn’t have a working product and they’re asking you to invest in their token sale, it’s likely a scam. The ICO claims they can accomplish impossible feats.
- ICOs that falsely claim they can accomplish things like creating a completely decentralized network or revolutionize the way we use the internet are likely scams.
- The ICO has very unrealistic token sale goals. If an ICO is asking for a huge amount of funding but they don’t have a proven product or any real-world use cases for their token, it’s probably a scam.
Are crypto rug pulls illegal?
Yes, crypto rug pulls are illegal. And many ICOs have been investigated or shut down as a result of fraudulent marketing practices. The SEC even created a fake ICO website called HowieCoin to trick investors into believing they were investing in a real ICO.
In many cases, the SEC and FINRA will take action against these ICOs and shut them down before they can scam investors. However, there are some legitimate reasons why an ICO might try to pull a rug on investors.
For example, an ICO might be waiting to launch a beta version of their product before they publish a whitepaper that accurately outlines their goals and milestones. In a situation like this, the ICO will likely post a disclaimer or warning on their website letting investors know that the whitepaper is being updated and that the published details are out of date.
How to avoid a rug pull in crypto?
The best way to avoid being pulled by an ICO is to do your research before investing. When evaluating an ICO, make sure you read their whitepaper, scrutinize their token sale goals and milestones, and try to find as much information about the people behind the project as possible. Unfortunately, it’s sometimes difficult to tell whether or not an ICO is legitimate.
There are no hard and fast rules when it comes to investing in ICOs, and as long as you’re careful, you can reduce your risk of getting pulled by a crypto scam.
Conclusion
There are a lot of reasons to be excited about the future of crypto. However, with all the new opportunities and new scams popping up, it pays to be careful. If you’re interested in investing in crypto, don’t be greedy; do your research and make sure you understand the risks and rewards of each individual token before you invest.
Finally, it’s important to remember that no one can predict the future. If a token sale or an ICO seems too good to be true, there’s a good chance it is.
Crypto is a wild west industry where anything goes, and the best way to stay safe is to proceed with caution.
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