What Is a Rug Pull?
A rug pull is a type of cryptocurrency scam where the developers of a project suddenly take all the funds from the liquidity pool, leaving investors with worthless tokens. This dishonest action usually happens after the token price has been artificially raised, often through coordinated buying or "pumping" of the token's value. Once the scammers have gathered enough funds, they execute the rug pull by exiting the project.
This abrupt sale causes the token's price to drop sharply, resulting in investors losing between 90% to 95% of their tokens' value.
How to Easily Prevent Rug Pulls
One effective way to safeguard your investments is by checking the initial token purchases and supply distribution of a cryptocurrency project. Here's how you can do it:
- Examine the Token Supply
- Start by looking at the total supply of the token and how it's distributed among different wallets.
- Check the Developer’s Holdings
- Pay close attention to the amount of tokens that the project owners or developers hold, especially during the early stages. If you notice that the developers have purchased a large quantity of tokens at the very beginning and haven't sold any of them, this can be a red flag. While not all large holdings are indicative of a scam, disproportionate ownership without any selling activity often suggests that the developers might be planning a rug pull.