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April 8, 2022

Spotting a “Rug Pull” in Crypto

A crypto rug pull is one of the most common ways that crypto investors lose their funds within the industry. It is an easy scam to fall victim too and very hard to spot when it will happen if you don’t know what you’re looking for. Simply, a rug pull is when the founders of a cryptocurrency token pump the price of a token up and then disappear with the funds. This is done through a variety of ways, but usually there lays a vulnerability within the smart contract of a token that allows for this. In the world of decentralized finance, where bullish investors pump thousands of dollars into whatever is popular, it is more important now than ever to do your own research before investing, make sure the founding team is trustworthy, and prevent yourself from having your money stolen out from under the rug.

Types of rugs

There are generally two different types of rug pulls. A hard pull is when the token founder maliciously left a vulnerability in the contract that allows for them to steal all of the invested funds from the participants. The intention here is to defraud the investors from day 1, and are simply setting up a scam hoping it goes undetected. A soft pull can sometimes be a bit harder to spot, but all comes down to trusting the developer. A soft pull occurs when the developer or another founding member “dumbs” a large amount of their holding all at once to drive the price of the coin way down, while securing their profits. Although this is unethical, there is some gray area in the action of dumping an asset.

Are rug pulls illegal?

The legality of rug pulls can be debated in certain aspects, but the fact of the matter is that hard rug pulls are illegal. The developer is setting up the currency to fraud their investors and running away with the money. The difficulty in these scenarios with prosecution is that the identity of the thief is hardly known. Most developers with hidden intentions will go to far lengths to keep their true identity hidden, while still trying to muster up as much trust as possible from the community still. Crypto rug pulls reportedly took 2.8 billion US dollars from investors in 2021, according to a report by chainanalysis.

How to avoid getting crypto rug pulled

Here are a few key things that an investor should look out for before placing their trust in a currency: Unknown developers, no liquidity, developer access to main wallet, limit on sells, suspicious promises. Without deeper knowledge of smart contracts, it can be difficult to figure out if there is a limit on sell orders or if the developer has access to a large amount of the tokens. It is important to invest time researching the blockchain and smart contracts before diving too deep into the altcoin crypto space. Doing your own research is the best thing possible before jumping headfirst into a surging coin, as you could be setting yourself up for a rug pull.

Crypto Taxes

With all that being said, if you do decide to jump into this world of crypto and even pick yourself up some tokens or NFTs, you need to make sure that you have the proper tools on hand to help you manage your financial accounting needs. One of the best solutions for you will be Ledgible.

With Ledgible, you can report and keep track of your crypto transactions with the supported integrations as you dive into the crypto space with this new information. If you want to learn more about Ledgible and get started for free, click here.

Disclaimer: The author and Ledgible do not provide investment advice and nothing in this article is meant to be taken as such. This website is presented solely for informational and entertainment purposes and is not to be construed as a recommendation, solicitation, or an offer to buy or sell / long or short any securities, commodities, cryptocurrencies, or any related financial instruments.

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