What are rug pulls and how to save yourself from them?

Lately, there have been some mind-boggling scams in the crypto market that duped customers out of all their investments in that particular asset class. These are pump-and-dump schemes, commonly known as rug pulls.
We make you aware of the various types of rug-pull scams and ways to save yourself from them.
Firstly, what is a rug pull and how does it happen?

A rug pull happens when developers siphon off the investors’ money and abandon the project after a huge amount is allocated to the fake crypto or DeFi project.
These projects are generally created by people with malicious intent.

There are mainly 3 kinds of rug pulls :

In this type of scam, developers create a liquidity pool with their newly-minted scam token and a valid cryptocurrency, like Ripple.

In order to make the crypto tradeable, this liquidity pool is infused with some amount of the currency.

When investors are convinced about the new crypto’s worth, they start buying it in lieu of their valid crypto, which is then locked up in the liquidity pool for a specific period of time.
When the value of the token rises, the fraudulent developer pulls out an entire amount of valid cryptocurrencies from the liquidity pool.
The duped investors are then left with valueless tokens.

2. Disabling the ability to sell tokens

In this case, investors purchase hoax digital currency.
But developers apply certain codes due to which investors can’t sell their coins back to the exchange.
When the price of the currency rises sufficiently, the developer is able to sell his coins, while the investor cannot.
The developer then flees, pulling out all the investments.

3. Developers cashing out

Here, the project is created by a malicious developer with an unbelievably high value proposition.
The project normally involves a token feature or a soon-to-be released token.
In reality, the developer creates a worthless token and keeps a huge part of these tokens for themselves.
As the price of such an asset rises due to hype and promises, investors gather in large numbers to buy these tokens.
Then the developer drains out his shares, gradually to avoid being caught.

Two of the biggest crypto pump-and-dump scams until now are :
Squid game cryptocurrency

The price of Squid tokens rose an unprecedented 2,30,000 per cent within 2 weeks.
On November 1, 2021, the developers pulled about $3.4 million from investors, and the token crashed from US$2,861 to US$0.01 in just 5 minutes.

BitConnect

It was a multi-level, Ponzi scheme where the fraud project crashed in January 2018.
BitConnect pilfered nearly $2 billion.

How to identify these rug-pull scams in cryptocurrencies and avoid them?

Rug-pull scams appear suddenly from nowhere.

These fake projects are mostly accompanied by a lot of hype, about revolutionizing the crypto world.

If there are anonymous developers of a project, then they should be considered doubtful and illegal.
The liquidity of a cryptocurrency should be verified by looking at its 24-hour trading volume.

An extremely low liquidity makes it easier for the developer to manipulate the token’s price.
According to Forkast, the rule of thumb is that the trading volume should be at least 10 per cent to 40 per cent of the coin’s total market capitalization.
Liquidity of the crypto should be locked, as it eliminates the possibility of stealing tokens.

The total value locked (TVL) is another parameter to check the legitimacy. A lower TVL increases the risk of a rug pull.
These fake projects have negligible presence on social media and lack genuine community engagement.
A project appearing overnight usually has a very short whitepaper, which is indicative of a dubious project.