How Does A Crypto Rug Pull Work
This guide will help you to understand crypto rug pulls, how these fraudsters operate, and how you can identify fake crypto projects to keep you and your investments safe.
What Is A Rug Pull?
A rug pull is a type of cryptocurrency scam where developers deliberately abandon a project after collecting and withdrawing investor funds.
It usually begins with the creation and promotion of a new token. Developers keep a large portion of the supply for themselves, build hype through social media and influencer campaigns, and attract investors.
Once enough liquidity or investment is raised, they abruptly sell off their holdings or disappear entirely, causing the token’s price to crash and leaving investors with worthless assets.
The rug pull scam has become commonplace in the decentralized finance (DeFi) world, with billions in losses throughout the blockchain ecosystem.
A rug pull requires the scammers to co-ordinate social media and KOL campaigns, trick partners and influencers, to maintain multiple lies, and to generate artificial hype that lures in unsuspecting victims.
While most victims are investors, rug pulls also damage the reputations of influencers, partners, and trading platforms caught up in the deception.
Rug pulls are not specific to any one area of cryptocurrency. They can take place with NFTs, memecoins, shit coins, regular tokens, Web3 games, and beyond.
What is consistent, however, is the high level of manipulation involved to create the illusion of legitimacy, activity, and opportunity.
Often, these cybercriminals will go as far as generating artificial market activity by buying and selling tokens to control prices.
How Do Crypto Rug Pulls Work?
Rug pull scams usually begin with a well-coordinated project launch designed to inflate a token’s price or attract large amounts of investment.
These scams are typically run through Twitter, Discord, and Telegram, often involving social media influencers, known in crypto as key opinion leaders (KOLs), who may or may not realise they’re promoting a fraudulent project. The campaigns are filled with bold promises and exaggerated claims that will never materialise.
At some point in time, there will be a dramatic upward spike in token value - this is when the criminals strike. The perpetrators execute a massive orchestrated sell-off, tactically maximizing their profits, while devastating investors. This is called a liquidity pull, and it leaves investors with worthless tokens.
The most common place for a rug pull to take place is on a decentralized exchange (DEX).
Since these trading platforms are anonymous, they lack centralized oversight, which has its pros and cons.
Unfortunately, this autonomy is also a vulnerability, and makes them the perfect breeding ground for fraudsters who are keen to avoid detection and accountability.
Now, while many rug pulls appear similar, under the hood at least, they have quite different mechanics. It pays to be aware of the different types of crypto rug pulls.
Types of Crypto Rug Pulls
Liquidity Pulls
A liquidity pull is truly one of the most damaging forms of crypto fraud.
It happens when developers suddenly withdraw all available trading liquidity from decentralized exchanges (DEXs), often at a time when token prices, investor confidence, and project hype are at their peak.
The pull is usually executed quietly, often during off-peak hours when major token holders are inactive. By the time the market wakes up, the liquidity is gone, the token’s value has collapsed, and investors are left holding worthless digital assets..
Warning signs:
No liquidity lock or very short lock periods
Single wallet holding the majority of LP tokens
Suspicious contract permissions
Unusual liquidity pool configurations
Fake Crypto Projects
Using every trick in the book, fake crypto projects deliberately mirror legitimate ventures. They build polished websites, write glossy white papers, and grow social followings.
They manufacture credibility with fake partnerships, phantom team members, staged development updates, bogus product launches, and counterfeit IP.
For months, they nurture trust and collect investor funds while maintaining the facade. Then, without warning, the operators vanish with the money, leaving behind nothing but empty promises and worthless tokens.
Red flags:
Anonymous team members
Unrealistic promises or returns
Plagiarized content
Pressure to invest quickly
Limited technical documentation
Pump and Dump Scams
A pump and dump scam is a coordinated market manipulation strategy where cybercriminals artificially inflate a token’s price through fake trading volume, coordinated buying, and aggressive social media promotion.
The scammers quietly accumulate large positions at low prices, then use multiple wallets and trading patterns to create the illusion of organic growth.
As the price rises, new investors experience FOMO (fear of missing out) and rush to buy in, driving the token even higher.
Once the target price is reached, the team executes their plan. They sell off their holdings rapidly across different wallets and exchanges, crashing the market and leaving regular investors facing devastating losses.
Read more about pump and dump scams in crypto.
Warning Signs
Sudden price increases without fundamentals
Unusual trading volume spikes
Coordinated social media campaigns
Bot-like trading patterns
Team Exit
There are two main types of team exit rug pull crypto scams - gradual and sudden.
In a gradual team exit, developers slowly distance themselves from what began as a legitimate (or seemingly legitimate) project. Communication drops off, development updates become infrequent, and activity fades, yet just enough effort is made to avoid triggering a panic sell-off.
The most painful part for investors is the false hope. Many continue to hold their tokens, believing the project will rebound, long after the team has quietly disappeared, resulting in major financial and opportunity losses.
A sudden team exit, as the name suggests, happens in an instant. Communication channels go dark, social media pages vanish, websites are taken offline, and all contact ceases. The project, and investors’ money, are gone overnight.
Depending on when it occurs, this kind of rug pull can also coincide with a liquidity pull, fake project exit, or pump-and-dump scheme, amplifying the losses.
How To Identify & Protect Yourself From Rug Pulls
DYOR - Do Your Own Research. Before you invest in a project, research everything, but especially the development team, the technology, and their goals. Try to find about them on Twitter, Reddit, or in TG/Discord channels. If red flags appear, there’s probably no smoke without fire, so be careful not to overlook things like a lack of transparency or sudden price surges.
Security Audits - If a project has passed a reputable third-party inspection, they’re going to be quite proud of it and make it known. When there are no security audits to speak of, be cautious.
Community Engagement - Active communities are a good signal of legitimacy, but even the best scammers have found ways around this by paying hired hands to make communities look active and buying fake followers.
Warning Signs - Unrealistic returns, excessive hype, and pressure to invest - these are just a few things that should put you on high alert, and while that might not make them a scam project, they are warning signs that should encourage you to do more research.
Reputable Exchanges - As we’ve mentioned, some DEXs are targeted by scammers as being vulnerable and exploitable. Therefore, stick to only the best and most trusted platforms if you’re going to invest.
5 Interesting Crypto Rug Pulls
Ruja Ignatova - OneCoin
Dubbed the “Cryptoqueen”, Ruja Ignatova used her OneCoin project to create a $4bn Ponzi scheme based on a multi-level marketing structure. Investors in 175 countries were promised lucrative rewards, but it was not to be. Ruja disappeared in 2017 with the funds.
She’s been on the FBI’s Most Wanted list ever since.
Victims speculate that she either orchestrated a perfect escape plan and new identity, or a victim of her scam sought vengeance.
Faruk Fatih Özer - Thodex
Thodex was a Turkish cryptocurrency exchange that mastered its own downfall in 2021. Özer, the CEO, claimed technical issues, before fleeing to Albania with $2bn in investor funds, after luring users with promises of free DOGE, among other things.
He was caught in August 2022, after a 15-month manhunt, in the Albanian seaside town of Vlorë. A judge in Turkey sentenced him to 11,196 years in prison.
Unknown Developer - AnubisDAO
Launched back in October 2021, AnubisDAO was a fork of OlympusDAO.
It lasted less than a day.
Despite its rapid rise and fall, it had raised $60m in ETH through sales of its ANKH token, before an unknown developer moved all of the funds (13,597 ETH) to a different wallet.
A word of warning, he has still not been apprehended.
On-chain analysis also revealed that, after a 3 year hiatus, this unknown developer returned in 2024 to perform another scam.
Uranium Finance
In April 2021, developers exploited a vulnerability in Uranium’s smart contract migration process that allowed them to steal $50m in investor funds during a protocol upgrade.
The project was billed as an automated market maker (AMM) and was growing in popularity in the Binance Smart Chain ecosystem before this rug pull took place.
Squid Game Token (SQUID)
Capitalizing on the extraordinary success of Netflix’s Korean hit series, SQUID launched and exploded too, surging 23,000% in its first week.
The token reached $2,861 before crashing to almost zero after the developers disabled selling features and disappeared with about $3.38m.
While this is quite a small amount by comparison with other scams, it was notable because the scam involved coding an “anti-dump” mechanism that meant investors couldn’t sell.
Ironically, mirroring the Netflix series, the criminal masterminds are yet to be caught.
Conclusion
Finally, and this is solid advice that will always serve you well…
Never invest more than you can afford to lose.
Safety is crucial. Investment is largely an independent activity and decisions will ultimately be made by you.
This means you don’t always have someone around to bounce ideas off or ask for a second opinion, so you’ll have to develop a nuanced understanding of crypto projects, scams, and when something seems too good to be true.
You’ll need to be able to trust your own intuition as well as know how to find answers to the difficult questions.
Good luck out there and stay safe!