A new type of scam has emerged in the hype-filled world of cryptocurrencies: the “rug pull.”
The scam, which gets its name from the expression “pull the rug”, involves a developer who attracts investors to a new cryptocurrency project and then withdraws before the project is built, leaving investors with a coin with no money. worth. It is part of a long history of investment schemes.
“This is not an exclusively crypto phenomenon. This is a people phenomenon. Crypto is just the latest way to go,” says Adam Blumberg, a Houston-based certified financial planner who specializes in digital assets. But cryptocurrencies have particular risks due to loose regulations for fundraising and their emphasis on decentralization.
Cryptocurrency projects often use “smart contracts,” agreements that are governed by computer software, not the legal system. This setup can be a benefit when it reduces transaction costs, but it also leaves few resources if things don’t work out.
Rug pulls have been particularly common in decentralized finance, or DeFi, projects that aim to disrupt services like banking and insurance. NFTs, or non-fungible tokens, which provide digital ownership of art and other content, have also been involved in rug giveaways.
Investors can protect themselves by choosing established cryptocurrency projects, ensuring that the code of any new projects has been reviewed, and verifying the identities of the developers.
Choose established products
Carpet pulls are more common with new projects that have not received the same scrutiny as more established cryptocurrencies.
Bitcoin has its risks, but countless people around the world have used it and reviewed its inner workings, which are available online.
Newer projects don’t have that track record, which means there may be vulnerabilities that make it possible for their organizers to siphon off value from investors and keep it for themselves.
If you’re struggling to get over the hype, one way to find established projects is to look to centralized exchanges like Binance, Coinbase, and FTX. While the presence of a cryptocurrency on a large exchange is by no means a guarantee of its quality or investment potential, assets are often reviewed by these companies before they are put up for sale.
The trade-off of investing primarily in more established assets: While cryptocurrency has generally experienced periods of rapid price appreciation, the biggest rewards may come from new projects where the risk is also higher. These are often listed under “decentralized exchanges”, which do not rely on any centralized authority preventing untested projects from joining.
Rex Hygate, founder of DeFiSafety, a company that reviews projects in the field, says that scammers can take advantage of the fear of missing out generated by rare but true stories of mind-boggling profits.
“It’s seductive. People have made a lot of money. That’s a fact,” says Hygate. “The hope is real, albeit small, (and) therefore criminal organizations in an organized and regular way are doing these rug pulls.”
know the code
The fate of any investment in cryptocurrency or blockchain projects depends on the integrity of the project’s computer code. You may not be a computer programmer, but you should at least understand how a product works before investing in it.
One way to evaluate a potential investment without going unnoticed is to see if it has been audited by a respected professional organization in the industry. Projects that have received good ratings from auditors will often promote results on their own.
Investigate the people
Some of the biggest red flags in the crypto world are due to human factors.
While it is not uncommon for people to use cryptocurrency pseudonyms, reputable developers often have websites and references that can establish their credentials.
But even if you do your homework, there is no guarantee of success. For example, the founder of Rugdoc.io, a service that reviews new projects, says she herself ended up getting scammed with an NFT that was supposed to be an event ticket.
Diversification is just as important in cryptocurrency as it is anywhere else in finance. Projects can fail due to technical glitches or business errors, even without malicious intent.
“Assume that whatever you’re investing in is going to have a problem,” says Leah, the founder of Rugdoc.io, who asked that her full name not be used to protect her identity from scammers seeking retaliation. “If you plan for failure, if you don’t fail, you’re going to have a very good day. And if it fails, you probably won’t go bankrupt.”
This article was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and informational purposes and does not constitute investment advice.
Reference-triblive.com