WTF is a Rug Pull?
The #1 Risk that Can Happen Across All Crypto-Based Projects is Rug Pulls.
TL;DR: How to feel good about actually missing out on NFT and Crypto Projects.
I saw a headline yesterday that I instantly knew, I’m going to write about it and make you laugh. Catch the headline at the end. For those of who feel FOMO, or feel like “you could have been rich” on crypto from “just investing” let me tell you. LOL.
Anyway, I’m writing currently writing about Coins vs Tokens, NFTs, and Metaverse. Was thinking of Metaverse March but that might be intense. We’ll see.
As always, you can find TL;DRs and graphics as I explain this shitshow cash grab set of concepts.
P.S. If you need help with Crypto Taxes, LMK.
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Sections You Can Skim To
WTF is a Rug Pull?
HOW does a Rug Pull Happen?
HOW to Avoid It?
TL;DR: You invest and lock in money in to a team. Team abandons you.
In Crypto - A rug pull is when the team or company behind a crypto project abandons the project, and then sells or removes all of the liquidity. The team withdraws, you’re screwed financially. There are many famous cases, but I’ll keep the hilarious collection at the end.
So let’s talk about how a Rug Pull happens and what you can do to run from it.
TL;DR: HYPE. FOMO. EXIT. LOSE.
Here, follow this recipe.
HYPE
A Crypto-based project gets over hyped as hell. Back the project, and the project team promises to pay you back with interest or dividends or benefits. The team hires an influencer to convince you of their legitimacy.
People buy in to the hype.
People don’t want to FOMO.
People buy into the hype more.
People don’t want to FOMO because they missed it last time.
People quite literally - buy - into the hype.
ABANDON AND DIP
Now you have a Project Team whose token or cryptocoin or offering has a lot of liquid capital as a result of all the people who contributed crypto to it. Then the project team abandons it all.
DIP VIA LIQUIDATION: The team sells their tokens at the highest market price, and removes liquidity - so the investors / contributors to the project struggle to sell their stake at a high price because the price automatically adjusts downwards when such a high volume sale happens. Investors are forced to sell at a super low price - its a loss.
DIP VIA EXPLOIT: The team uses a technology backdoor in their smart contract and steals your funds and leaves you high and dry. Investors lose.
That’s it. That’s literally a rug pull. People bought into the hype and got screwed over. We’ve seen it in modern business. We’ve seen it in kickstarters. We’ve seen it with terrible pre-orders of video games. And now we see a lot of it in Crypto.
Why in Crypto? Because it’s really easy to carry it out, and really easy to get away with it.
TL;DR: The Running List on Vetting Projects. - Alternatively, just run.
Sorry to say it, but it’s rather time and energy intensive process to avoid it. If you are interested in a project, you will need to vet them at all possible angles. And then you will need to continuously do it.
Vet the Team -
If they are anonymous, run.
If their profiles look phishy or too simple, run.
If their profiles look inorganic - run.
If they are like Elizabeth Holmes, run.
Vet the History
If the project appeared overnight - run.
If the project has literally no history - run.
If the project can’t be corroborated by others, run. And even if it can, double check that corroboration.
Vet the Tech
If the project fails to produce audit reports - run. (And Audits can’t 100% cover everything)
If the project fails to lock access to liquidity (so developers can access the funds) - run.
If the project has so many Segregation of Duties issues, or scenarios where Developers have all the power on the funds - run.
Vet the Community
Lack of counter points? Run.
Lots of regurgitation? Run.
Lack of anything remotely resembling an intelligent conversation? Run.
Screw the Fomo
If a Tiktok or Instagram Influencer is talking about it - run.
If too many people are talking about it like they know it, but they all have the exact same talking point and no one has create derivatives or made a great and considerable expansion on it - run.
Vet the Business
If the project has too many features that are in the roadmap, and they haven’t delivered anything, or barely delivered, run.
If the project likes to point out to big names all the damn time, those are buzzwords and you should be suspicious.
If the project’s business model makes no sense to you, run.
If the project is stealth, probably run or know that you aren’t the intended benefactor.
I’m basically telling you that the risks are very high and you need to be extremely diligent. You are essentially investing in a product team and company. You have to vet them like one as well. If they promise the stars, run. If they seem inflexible, run. If no one knows who they are, run.
TL;DR: Here are some funny headlines
Pornstar screws community investors ($1.8m NFT Project CryptoSis)
Big Boomer Company Doesn’t Understand NFTs and Screws Consumers (Ubisoft NFT Scheme)
SQUID GAME - But only one person won. ($3.3m Liquidation after 23,000,000% growth)
GOLD Digging Project Drains 760k (Play2Earn Game with $760k drain)
If you want my semi-mature take on how to invest:
Do you understand the business? If yes, good.
Do you understand the tech? If yes, good.
Do you know the founders/team? If yes, good.
Do you know what human problem it solves? If yes, good.
Are you okay with stock option trading with a 10 day length? If no, reconsider.
P.S.S. YMMV but it’s like gambling.
If Larry David tells you it won't work (and he's never wrong), run.
Good advice.