How Does a Crypto Rug Pull Scam Work (Plus Examples)

Cryptocurrencies started as a simple fad, but have well and truly become an integral part of modern life. The extraordinary rise of Bitcoin, in particular, has made many people eager to invest in crypto in the hopes of earning themselves a veritable and perhaps life-changing fortune.

Unfortunately, those same people are often targeted by scammers, and one of the most popular tricks in the crypto scammer’s playbook is the “rug pull.”

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How Do Crypto Rug Pull Scams Work?

Crypto rug pull scams occur when a development team or new crypto company offers a new cryptocurrency or some other digital asset (like NFTs) for sale. They usually hype up the project, discuss long-term plans, and suggest that those who get in and invest early could multiply their money. Then, they vanish, taking all the funds and leaving investors empty-handed.

That’s why these scams are called “rug pulls,” as they essentially pull the rug from under investors’ feet, leaving them with nothing when they hoped they’d discovered a winning investment.

There are a few different sorts of these rug pull scams, including:

Pump and Dump: The developers behind the new token or asset hold a large supply of it themselves, and then sell off all their supply once the token reaches a different value, causing a huge crash.
Liquidity: This is when the developer usually lists a new token, paired with a major form of crypto, like Ethereum. They’ll use various tricks to incite investment, then withdraw all the liquidity, making the token essentially worthless.
Limiting Sell: This one isn’t quite as common but may still occur. It’s when a team codes a new token so that they’re the only ones able to sell it. This essentially traps investors, as they can’t sell off their investments, and the creators can bide their time, wait for a peak value, and sell everything off.

There have been many examples of rug pull scams over the years, like:

SQUID: This was an example of a limiting sell rug pull scam. The creators made a new token based on the Netflix show “Squid Game.” They raised millions and made it so that the investors couldn’t sell the coin after they’d bought it.
Evolved Apes: Riding the success of “Bored Apes” NFTs, Evolved Apes launched with 10,000 assets and promises of a video game that never actually got made. Instead, the developers simply vanished, taking the profits with them.
AnubisDAO: Investors lost tens of millions of dollars in this crypto rug pull after the developers created a decentralized currency, despite having no official website or whitepaper, and drained the liquidity pool only hours after the investment period began.

Red Flags You Shouldn’t Ignore

Unknown Developers

The vast majority of crypto rug pull scams are pulled off by developers who are essentially ghosts. They come out of nowhere, without any history or established presence in the industry, create a new asset, and then vanish into the ether, taking investors’ funds with them.

Lack of Information

Many of these rug pull scam projects also fail to provide clear information, like roadmaps or whitepapers detailing their plans. They often seem vague and focus more on crazy claims of how much money you could make without explaining why.

Excessive Marketing and Hype

In order to run away with investors’ money, scammers have to get them to invest in the first place. They usually do this by building hype around their project through investing in marketing. They may pay off influencers, for example, or publish paid-for posts on many blogs and websites talking about how their coin is the next big thing.

Too Good to Be True Claims

If something sounds too good to be true, it probably is. This applies to crypto rug pull scams, too. Many of these scams target people who perhaps missed out on Bitcoin but want to find something similar, so they suggest that if you invest, you could multiply your money by 10, 100, or more.

How to Stay Safe from Crypto Rug Pull Scams

Be cautious about investing in hyped-up projects from unknown teams.
Research each project thoroughly, read the whitepaper (if there is one), etc.
Avoid putting money into tokens with very low liquidity.
Have patience. Rather than rushing into new investments, observe them for a while first.
Invest in established tokens and assets from trusted developers.

Report the Scam

You can report suspected crypto scammers to the Secret Service, or:

Report to the FTC.
Report to the FBI Internet Complaints Center.

How to Protect Yourself More

Subscribe to our scam alerts to learn about new scams and threats as they emerge.

Subscribers also get regular emails from Scam Detector with top tips on how to stay safe, red flags to watch out for, and other important scam-related information.

Read up on other crypto scams, like Bitcoin scams, so you know what similar dangers are out there and how to avoid them.

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