With the rising popularity of memecoins after the meteoric rise of Dogecoin, we are seeing a lot of random coins and tokens pop up all over DEX platforms. The promises are enticing… 10x, 100x, even 1000x value is being marketed with a great majority of these cryptos. This is meant to catch the eye of the investor and draw them in as they are promised massive returns for their investment.
Some individuals may get lucky and get in at just the right time… seeing at least a 10x rise in value on their initial investment. Others will see this rise on the price chart and begin FOMO buying, trying to get their share of the profits as well, further boosting the holder amount and market cap value of their newly found crypto. It doesn’t always work out that way though. These new memecoins have a high risk of a rug-pull, and we are seeing more of this happen to investors every day. The crypto's Twitter, Telegram, and Instagram accounts are constantly promoting its' growth, people hype it up when talking about it, and then poof! Developers have left the chat. Promotion stops. Your investment is now worth nothing. Your rug just got pulled from underneath you... ad you are now left with nothing.
In this article, we are going to take a look at these rug pull scams, see how they happen, and what you can look out for so you can avoid this ever happening again in the future!
A rug pull is a malicious attack on investors where crypto "developers" abandon a project and run away with all of the investors' funds. Developers used lightly in this context, as these individuals aren't even developers at all... but rather a crypto scamming enthusiasts. These rug pulls typically occur within the decentralized finance (DeFi) ecosystem, especially on decentralized exchanges (DEXs). These malicious individuals create a token, list it on a DEX (ie PancakeSwap), and then pair it with a leading crypto like Ethereum or Binance Coin for swap-trading.
These coins and tokens typically charge a fee somewhere in the range of 5% to 12%, marked as "slippage" on a DEX. These fees are claimed to be distributed to holders, as well as locked away in a liquidity pool. Once the tokens are "locked", the developers cannot touch them for a certain amount of time (typically 3-5 years)... or so they claim. This is how the rug pull comes into play.
Rug pulls thrive on DEXs because these exchanges allow uses to list tokens free-of-charge and without any audits from third-party sources. Creating these tokens on open source blockchain protocols is also free and easy to accomplish. The malicious individual behind the "project" uses these key factors to their advantage and, without a sweat, a new memecoin is created for one sole purpose - to drive the value of it up and run away with everyone's investment. These are commonly compared to ponzi schemes.
Once a significant amount of investors swap their valuable crypto for the memecoin, the creator(s) will then withdraw everything from the liquidity pool, driving the value of the coin's price down to nothing. This leaves all investors at a major loss and the creator is now running away with a major profit. The coin will gain attention through paid promotions from social media influencers, who will then [in return] damage their own platform by promoting a scam. It's really not a good move for anyone, unless the person behind the scam can sleep well at night knowing they just scammed thousands of individuals who believed in the initial project.
There are ways to avoid these awful crypto scams! To ensure you don't fall victim to a rug pull, it's always smart to check the liquidity pool. If the memecoin promises specific amounts of liquidity to be locked away for a specific period of time, follow up on it yourself. This will help you keep track of where the money is flowing and if it's being withdrawn at any time. The most popular way to check on this is through BSCScan.
Also, it's important to watch the price charts for the coins you've invest in, memecoin or not. If your memecoin skyrocketed 50x within the first 24 hours, be extremely cautious, as this could be a sign that the creators are going to cash out with your hard-earned money. This trick is typically skewed by the creator themselves. They will dump liquidity into the coin to make it appear as if it's rising in value but, in reality, it's just the creator filling their own bags in an attempt to get investors to FOMO-buy.
You should always double check the audits performed and the social activity of whichever memecoin you are interested in. If they are actively posting and updating their community, have a large following on social media platforms, and a completed audit from a third-party auditing source, it might actually be a reputable project. This is not always true though, and you should do all your research into anything you invest in. Keep in mind, you should always invest what you are willing to lose at any time. There's never not a risk to any investment, highly reputable or not.
I hope this article shined a light on the malicious attacks on investors through rug pull schemes. This was not meant to create FUD around your favorite memecoin. If you truly believe in what you invested in, then there is no need to worry. If your memecoin developer team is inactive, making false promises, and all-around absent within their community, then you should probably do some additional digging into what you initially invested in. If they are making claims that they are working on projects, make them provide proof. If they cannot back themselves up with any proof of progress, then it's probably a scam.
Be careful out there and make sure your investment never goes to waste! If you've ever been a victim of a rug pull, inform everyone which token it was by leaving a comment on this post. Thank you all for your support!