Rug pulls explained: how they happen and how to avoid them

Rug pulls are a type of crypto scam where developers hype their project for capital, then leave investors hanging when it reaches an all time high. This deceptive practice has become alarmingly prevalent in the crypto space, causing billions of losses. According to Chainalysis, rug pulls accounted for $2.8 billion in losses in cryptocurrency revenue during 2021.

However, your assets need not be left vulnerable. By employing strategies like due diligence and Haven1's robust risk management measures, investors can shield their holdings from rug pulls. Haven1's distinct recourse mechanisms offer an extra layer of security amidst a cryptocurrency landscape fraught with risks.

What are rug pulls?

A rug pull came from the idea of "pulling the rug" under the investor's feet. It is the most common type of cryptocurrency scam where project developers start by attracting investors by overrating the project, often through hyped-up posts on social media. It initially looks promising, but it's just a front for fake schemes, with developers waiting for capital to pile up before pulling out of the project.

Rug pulls aren’t a new phenomenon. However, it has become more common in recent years with the rise of crypto. Back to 2016, Bitconnect was a high-profile rug pull with aggressive marketing. Investors were guaranteed 40% returns after trading their Bitcoin for Bitconnect coin, but eventually lost when creators ran off with $2 billion.

How do rug pulls happen?

Rug pulls are essentially an exit scam. First off, project developers start by creating a new crypto token, marketing it as a profitable investment, artificially inflating its value through aggressive marketing, and then running off with the funds - eventually dropping the asset value to zero after abandoning the project.

Here are two methods typically used to abandon the project:

• Running away with stolen project funds
• Selling pre-mined holdings in large quantities

To expedite a fake project’s popularity, many scammers resort to using celebrities as promoters for their campaigns. Notable figures like Kim Kardashian and Floyd Mayweather were questioned for their involvement in promoting rug pull investments.

How to avoid rug pulls

There’s a common pattern to every rug pull scam. The most common one is hearing a golden opportunity to jump in the crypto trend before it takes off even more. Plus, big-name celebrities are throwing their weight behind it, so you think you can trust that it’s the real deal. However, there are some red flags you need to be aware of.

Here are common rug pull red flags:

• No whitepapers
• Unclear roadmaps
• Aggressive marketing
• Low liquidity 
• Too good to be true high yields
• Suddenly increasing prices
• No liquidity lock-up or vesting periods
• Fewer individuals own token distribution
• A suddenly unheard-of token becomes popular
• No extensive smart contract audits

Haven1 also protects users from rug pull vulnerabilities in ways no other on-chain platform can. You can seek proper recourse mechanisms and receive legal uncertainty protection, providing investors with fraud recourse and shield against uncertainties. With Haven1’s security features, you can prevent falling victim to rug pulls.

Protection against rug pull schemes

Crypto is the latest form of rug pull scheme and scammers will continue to try to find more loopholes and vulnerabilities to exploit. It’s an all-around tactic that can affect any industry, but crypto is currently most susceptible due to a lack of regulation assurance and its decentralized nature. To address this security issue, Haven1 combines the best of both traditional and on-chain finance to add an extra layer of protection for investors who need resolution.

‍