How to Avoid Crypto Scam Artists | Forexlive
We have all heard about that one person who invested
in some shady, worthless coin in hopes of getting a five or ten X, only for his
money to disappear overnight, and never wanting to trade ever again.
How exactly does that happen?
Well, the infamous rug pull happens anytime a
developer of a certain token runs away with the coin investors’ funds. This can
happen in basically three ways.
1. By “yanking” the liquidity pool
When developers create a token, they also need to set
up a way in which investors can actually buy it.
The standard method is setting up a liquidity pool
containing portion of valuable tokens and a portion of their newly minted
By having this token pair in the liquidity pool,
investors can thus trade their tokens for the new ones.
As time goes by and investors buy the new token, the
imbalance in the liquidity pool causes it to be higher priced.
When that happens, developers can pull out their
initial liquidity and thus get back the initial amount of the token which they
have created as well as the valuable token they have originally put in.
Consequently, due to how liquidity pools work, they
will be getting a lot more of the valuable token after they yank out the
Moreover, other investors will not be allowed to trade
because there is simply nothing else in the liquidity pool.
developers selling their shares
Anyone can create a worthless token.
Tokens derive value from whatever its project aims to accomplish or from other
people thinking it has value due to its potential or other surrounding factors.
As usual, developers will try to
convince the public that they are coming out with an amazing revolutionary new
project, a platform of some sorts, or any other enticing promise.
The premise is that their promising
something in the future and selling their idea to investors. As the price of
their token increases, they sell all their tokens they gave themselves during
the start of the token launch.
This method tends to happen very
slowly as time is needed to build up hype and, of course, wait for the price of
the token to increase.
removing your ability to sell
can in fact add code which will literally not allow their users to sell their
tokens back to the decentralized exchange and, of course, leave themselves out
means that the price of the token is only bound to increase as no one can sell
their tokens, even if they wanted to.
the price is really high, the rug pullers will sell the tokens which they
either gave themselves or bought early on at a very, very low price.
what can you do to avoid a rug pull?
a rule of thumb, we try to answer at least the 5 following questions
there locked liquidity?
developers will lock up their liquidity with a trusted third party to ensure
that they can’t pull out even if they wanted to.
close attention to how long that liquidity will be locked as it will attest
their commitment to their project.
the price can still be manipulated.
big are their wallets?
using handy tools blockchain exploring tools like Etherscan, you can find out
if large percentages of the coins are being held by a few wallets.
that is the case, it is very likely that the developer has bought a lot of
tokens during the initial launch at a very low price.
even if that isn’t the case, large wallets are indicators of whales. Whales can
still crash the price by selling considerable amounts of the token.
big is the burn wallet?
burn wallet can have a large percentage of tokens as means of hiding the whales
who hold the actual big wallets.
means sending tokens to an address which no one controls, meaning, getting rid
of them forever.
out of 1,000,000 tokens, 900,000 get burned, someone who is holding 10000
tokens will seem to be holding 1%, even though that 1% will in fact correspond
to 10% of all tokens in circulation.
the project audited?
will have independent third parties will perform audits as to attest their
authenticity. If a project you are looking at hasn’t been audited, consider it
a major red flag.
the project have a functioning website and social media presence?
can create a token but having a website and establishing social media presence
takes time and effort. By doing so, developers can get credence to their
the developers’ wallets “multisig”?
there is a whole team working on a project, one person can withdraw all the
funds. By having multiple passwords, for any transaction to happen, multiple
passwords from multiple people are needed.
crypto world is hardly regulated and, by having no one held responsible,
mischief and wrongdoing are to be expected at times. Moreover, anonymity
perpetuates this type of behavior.
this guide really ties the room together and by using it, it will be easy to
avoid a rug pull now. Just remember to pay attention to the signs before
jumping in and definitely don’t fall into the hype and FOMO combo.
Read More : How to Avoid Crypto Scam Artists | Forexlive