Cryptocurrencies are still a relatively new technology, and like all new technologies, there are lots of different terms. Today we will be looing at a “crypto rug pull.” So what is a crypto rug pull, and how can you protect yourself from becoming a victim? Keep reading this crypto tax calculator article to find out more.
A rug pull is a crypto scam where an organization pumps their project’s token price before vanishing with the funds, leaving investors holding a worthless asset. Rug pulls happen when fraudulent developers create a new crypto token, pump up the price and then extract as much value out of them as possible before abandoning them as their price drops to zero. Rug pulls are essentially exit scams that exploit decentralized finance (DeFi).
There are three main types of rug pulls in crypto: stealing liquidity, limiting sell orders and dumping. Continue reading on to find out more about crypto rug pulling and the different sorts.
Liquidity stealing happens when token creators withdraw all the coins from the liquidity pool, which removes all value that investors have injected into the currency and drives its price down to zero. These “liquidity pulls” usually occur in DeFi environments, where a DeFi rug pull is the most common exit scam.
If a developer codes tokens so that they’re the only party able to sell them, it’s called a “limiting sell order.” This is done maliciously in order to defraud investors.
Dumping happens when developers suddenly sell a large number of their coins, which rapidly drives down the price. Usually, dumping occurs after someone promotes the coin heavily on social media. The bigger price spike and sudden drop afterward is called a Pump-and-Dump Scheme.
Fraudulent rug pulls can be categorized as “hard” or “soft.” Hard rug pulls take place when a project’s developers deliberately code malicious backdoors, otherwise known as hidden exploits, into the project’s smart contract. The obvious intent to commit fraud differentiates hard rug pulls from soft ones. Liquidity stealing also generally falls under the category of hard pull.
When we talk about “soft rug pulls,” what we’re really referring to is when token developers quickly dump their crypto assets. This leaves a severely devalued token in the hands of the remaining crypto investors. While this dumping may be unethical, it’s not necessarily a criminal act in the same way that hard pulls are.
Hard rug pulls are illegal, and soft rug pulls are only unethical. If a crypto project team members vowed to donate money but chose to keep the funds instead, that would be an example of a soft rug pull. While it is difficult to track or prosecute either type, hard rugpulls present more challenges than soft ones.
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