What’s the Difference Between a Rug Pull and a Pump and Dump Scheme?
Reading Time: 5 minutesAlthough you’ll lose your crypto to either scam, how they operate is slightly different.
Scams and schemes lurk around every corner of crypto investing, making navigating the landscape difficult. Rug pulls and pump-and-dump schemes are two of the most pervasive and potentially catastrophic crypto scams. But how do rug pulls and pump-and-dump schemes differ?
What Is a Rug Pull?
In rug pulls, developers dupe investors, ‘pulling the rug’ from under them by carting away their crypto tokens. These malicious developers shill tokens on social media platforms to attract investors. Once they reach their target, they transfer all the crypto invested into their wallets or siphon it through a crypto exchange.
The first step after the developer has created a token is to lure investors, promising enough gains on their investments when the token becomes popular. They also make use of DeFi (decentralized finance) apps, which are decentralized and can hide their identities. Many of the smart contracts made by the fraudulent developers on these decentralized applications (DApps) are already rigged with malicious code to pull off their rug-pulling operation successfully.
Crypto Rug Pull Examples
There have been many notable rug pulls in crypto history.
On October 28, 2021, AnubisDAO rose from the dredges of the underworld with no website, no white paper, and little more than a logo inspired by DOGE and developers with pseudonyms. The project then launched a sale, promising ANKH, its token, in exchange for ETH provided by the investors. The hype was impressive, and in less than 24 hours, investors had contributed almost $60M.
With hours left till the conclusion of the sale, all 13,597 ETH tokens were removed from the pool, disappearing forever. The ANKH tokens received by the investors immediately became completely worthless, and the Twitter account that served as the official page of Anubis went offline. Unfortunately, little headway has been made, as no one is sure if one or all of the developers was responsible for the operation.
$60M is a huge amount of money. But what of Faruk Özer, CEO of Turkish crypto exchange, Thodex, who siphoned $2 billion, representing 90% of all rug pulls in 2021?
The CEO halted trading on the exchange in the same year of the Egyptian god’s fiasco. First, it was a maintenance that lasted days, then Özer blamed a cyber attack in 2018, followed by so-called suspicious transactions in over 30,000 customers’ accounts. Finally, he promised that all customers would receive their funds, and then the Thodex CEO disappeared into the night.
What Is a Pump and Dump Scheme?
A ‘pump and dump’ operation is a form of market manipulation where the price of a cryptocurrency is artificially inflated and, as it reaches a target, immediately dumped back into the market.
Most times, unlike rug pulls, executing a pump and dump scheme requires little technical know-how. A group usually carries out this scheme; they only have to select and invest in a target currency.
For maximum profit and easy manipulation, the target crypto has to have a low market cap and liquidity. Then, these ‘pumpers’ hype the crypto on social media. They do these by employing the services of financial influencers, like YouTubers, prominent crypto-Twitter accounts, and so on.
Other investors start buying into the false hype created by these influencers, thinking they’re getting a good deal. Then, the increase in demand starts to increase the price of the crypto sharply. Once it reaches a certain level known only to the pumpers, they sell all their holdings. This is the ‘dump’ stage.
The supply caused by the pumpers’ sudden crypto release causes its price to plummet fast. Understandably, other investors, seeing their much-hyped crypto lose its value, panic and sell their holdings as the pumpers profit. At this point, it becomes a rat race between the investors left with the now-worthless tokens. The faster you sell, the lower your loss.
Crypto Pump and Dump Scheme Examples
Some anonymous developers created a crypto project called Squid Game, modeled after the popular Netflix series. They also created a token, SQUID-USD, which could access the virtual games modeled after the series. These developers promised the winner of each game various cash prizes.
But there was a catch that no one noticed until it was too late. There was an anti-dumping mechanism tied to the token. Unfortunately, this meant investors couldn’t sell. Not unless they had what the developers called ‘marbles,’ which could only be gotten by winning games.
The games were yet to be live, so there was no way anyone could win and get any marbles. So all owners couldn’t sell no matter what. As there were only buyers and zero sellers, the token’s value skyrocketed from two cents on October 26, 2021, to $2,861 six days later. This was an astonishing increment of 14,300,000%.
Once SQUID-USD reached a record high, the developers who had given themselves a backdoor to selling their tokens dumped them. They carted off with $12 million and left the owners nothing except a token now valued at less than a penny.
How to Protect Yourself From Crypto Scams
In rug pulls, the liquidity behind the token has been taken, and this makes the token impossible to sell. However, although the token’s price has bottomed out in pump and dumps, some liquidity may remain in the pools. However, to protect yourself from crypto pump-and-dump schemes or rug pulls, you must learn to spot them.
1. Check Price Fluctuations
Before investing in any new cryptocurrency, check the price fluctuations. If a price hike is not due to real news, it is always safer to consider it a pump and dump. Also, it would be best to stick to regulated, centralized exchanges like Binance and Coinbase, where you invest in existing coins rather than new ones.
2. Avoid the Hype
A project might be a potential rug pull if you suddenly see celebrities and influencers discussing it. Legitimate crypto projects typically have a dedicated team and community marketing the token.
3. Liquidity
Before you invest in any new project, check the liquidity pool. A token’s liquidity can tell you a lot about it. Avoid cryptos with low liquidity (around $100,000), as they can be easily manipulated. For example, the project developers could pump a couple of thousand dollars into the pool and artificially increase the token’s value.
4. Check Whale Wallets
Another easy way to spot rug pull scams is to check the token allocation. For any token you plan to invest in, check how much the top wallets hold. They are commonly known as whale wallets.
If these whale wallets hold up to 20% of the total available tokens, it is likely a crypto scam or can turn into one soon. This is because these whale wallets can decide to dump their tokens and reduce the asset’s value in seconds.
You can check out the balances of wallets using blockchain explorers. For example, you could use SolScan to check wallets on the Solana blockchain.
Risk Is Inevitable, But Scams Aren’t
In the world of cryptocurrency, investing in any token has associated risks. However, there are some risks not worth taking. These include investing in projects with the above signs hoping they’re not rug pulls or ‘pump and dump’ schemes.
Before joining any crypto project, do a background check. Ensure the project has a legitimate team, a solid liquidity pool, and normal price fluctuations. Also, stick with regulated exchanges and exercise caution before delving into any project.
Reference: https://www.makeuseof.com/whats-the-difference-rug-pull-and-pump-and-dump/
Ref: makeuseof
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