the section about FUD</strong></a>!</p>\n<p>So, when the prices, trading volume, and trading activity decrease, it all is reflected by a decrease in crypto market capitalization. More commonly referred to as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-market-capitalization-market-cap-mcap/">market cap</strong></a>, it’s an index that calculates the size and value of a particular coin, or the entire crypto market, as a whole. Logically, <strong>when everything decreases, the market cap goes down, as well</strong>.</p>\n<p>A decrease measured by different metrics is then accompanied and consolidated by <strong>negative media content</strong>, such as news, columns, or critical comments. The positive sides and developments get overlooked, while the negative ones gain all the attention. This further strengthens the FUD that’s taking over the market, and everyone can feel the bear’s paws gripping the entire industry.</p>\n<h2>What Signs Tell Us We’re in a Bull Market?</h2>\n<p>Moving on, let’s turn to something more positive - <strong>a bull market</strong>. It’s probably not going to come as a surprise that when it comes down to a bullish market, <strong>everything is the exact opposite of a bear market</strong>. The main characteristic of a bull market could be summed up in one word: <em>“Increase.”</em></p>\n<p>Increase in cryptocurrency prices, increase in crypto trading volume, increase in trading activity, and in the overall crypto market capitalization. It’s something that’s quite evident when you’re learning about what is bullish and bearish in crypto, especially.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish:\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-05.jpg/" alt=\"What is bullish and bearish: The feeling of optimism during bull market.\" width=\"1000\" height=\"532\" /></p>\n<p><strong>This evokes a feeling of optimism</strong>, not only among traders, but investors, as well. If you hear more and more news about various projects receiving funding, this sends a signal that confidence has entered the room. This means that <strong>investors feel safe</strong> <strong>enough</strong> to choose riskier projects to invest their money into.</p>\n<p>In a bear market, investors usually opt for investing in assets that are considered <em>“safe havens”, </em>such as gold, government bonds, or, in the context of crypto, <strong><a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoin and <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum./nWhen optimism and confidence enter the market, investors feel like they can take a risk, and go for something less safe, such as a niche altcoin, or a less-known DeFi project. The main thing is that <strong>the money is coming into the market</strong>, and it further fuels the general optimism, and accelerates the bullish mood.</p>\n<h2>What Causes a Market to Turn Bullish or Bearish?</h2>\n<p>Moving further, it’s time to talk about <strong>what can suddenly trigger a market to change</strong>. In order for the entire market to go through a large change, massively important events have to take place.</p>\n<p><strong>Economic data plays a crucial role</strong> in how the market is going to look in the near future. For example, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-inflation/">inflation rate</strong></a> is something that traders must not ignore. Whenever inflation is on the rise, it signals that the Central banks may begin implementing harsher monetary policies, such as hiking up the interest rates.</p>\n<p>An increase in interest rates means that economic activity is about to decrease, and investors and traders may begin hesitating before investing in more-volatile projects or assets.</p>\n<p>Another crucial factor could be <strong>geopolitical events or natural disasters</strong>. A war, a terrorist attack, political instability, and similar events definitely add to the volatility and uncertainty in the crypto market. But sometimes, things happen in an unexpected manner.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: Market.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-06.jpg/" alt=\"What is bullish and bearish: Market.\" width=\"1000\" height=\"503\" /></p>\n<p>For example, <strong>when the war in Ukraine broke out</strong>, the market’s reaction was ambiguous. Some investors realized that Bitcoin, unlike local currencies, can be regarded as a safe haven, since it’s not affected by national boundaries. Therefore, despite the growing uncertainty, Bitcoin didn’t take a noticeable hit, and the market didn’t dive into a bearish phase.</p>\n<p>Finally, I’ve got to mention <strong>the crypto industry itself</strong>. Positive updates and news may lead to, or consolidate the bullish sentiment. While negative news, on the other hand, can be detrimental. And if the news comes out from something big and important within the industry, it can cause a domino effect, which could then result in everything turning bearish very quickly.</p>\n<p>A recent example could be <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/news/ceo-terraform-suggests-a-plan-to-save-ust-from-mass-destruction/">the collapse of the Terra Luna ecosystem</strong></a>. In 2022, <a href=https://www.bitdegree.org/"/cryptocurrency-prices/terrausd-ust-price/">UST and <a href=https://www.bitdegree.org/"/cryptocurrency-prices/terra-luna-luna-price/">LUNA, two interconnected coins issued by the same company, suddenly malfunctioned. In the course of 2 days, <strong>the LUNA coin went from $120 to $0.02</strong>, thus triggering a massive sell-off, and a wave of panic amongst investors.</p>\n<p>It’s estimated that as a direct result of this event, $60 billion evaporated from the crypto space. <strong>It created FUD, and threw the crypto market into its bearish phase</strong> that hasn’t yet passed, almost one year after the Terra Luna events.</p>\n<h2>Wrapping Up</h2>\n<p>Having said that, it’s time to wrap things up! I hope that, by now, you have learned what is “bullish” and “bearish” when it comes to crypto, what are their key differences, and how important it is for every trader to be able to tell them apart!</p>\n<p>The topic is, admittedly, rather expansive - <strong>we haven’t even gotten to the technical side of things</strong>, such as covering bullish and bearish candles! However, I will not go into more detail about the technical side in this section as there is so much to cover...</p>\n<p>Make sure to check out other sections in this <strong>Crypto 101 Handbook</strong> to find out more about it, and the crypto world, as a whole!</p>","meta_title":"What is the Difference Between Bullish and Bearish?","meta_description":"You might be asking what is bullish and bearish in crypto? Here, you'll find what these terms mean and why is it called bullish and bearish.","meta_keywords":"what is bullish and bearish, why is it called bullish and bearish, bullish and bearish patterns, difference between bearish and bullish, bullish and bearish candles","order":1,"language":"en","created_at":"2023-04-20T12:36:10.000000Z","updated_at":"2023-05-04T15:08:31.000000Z","modified_content":"<p>In this section, we’re going to talk about <strong>what is bullish and bearish in crypto</strong>!</p>\n<p>As the <a href=https://www.bitdegree.org/"https://en.wikipedia.org/wiki/Charging_Bull/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Charging Bull statue on Wall Street</strong></a> lets the world know, investment is all about that bullish attitude and energy. But as there are two sides to a coin, there are two different sentiments that can encapsulate the overall current state of the market. This, of course, very much applies to the crypto market, as well.</p>\n<p>The expressions <em>“bearish”</em> and <em>“bullish”</em> are essential parts of every trader’s vocabulary. There are many signs and signals that <strong>allow traders to understand what state the market is currently in</strong>. But in order to be able to read those signals, a trader must understand the very definitions of these two terms!</p>\n<p>In this section, we’re going to talk about what is “Bullish” and “Bearish” in crypto, why is it called “Bullish” and “Bearish,“ in the first place, when are these terms used, and how traders can understand in which condition the cryptocurrency market is, at any given point in time. As always, I’ll provide real-life examples to illustrate my points.</p>\n<p><em>Let’s begin!</em></p>\n<h2>What is a “Bear Market”?</h2>\n<p>When it comes to both crypto and traditional stocks, the term “bearish market”, or simply, “<strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-bear-market/">bear market</a></strong>”, refers to a <strong>market that could be described as going through a downwards trend</strong>. When traders find themselves in a bear market, this means that the prices are falling, the general mood is pessimistic, and investors hesitate before investing. It all boils down to a common feeling of uncertainty about how the market will perform in the near future.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: Bear market.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-01.jpg/" alt=\"What is bullish and bearish: Bear market.\" width=\"1000\" height=\"572\" /></p>\n<p>When it comes to crypto, a bear market is when the <strong>prices of cryptocurrencies are in continuous decline</strong>, new projects struggle to attract investments, and there’s an overall lack of confidence in the whole trading sphere. Or, to put it shortly, it’s when the numbers on charts turn red, and stay that way for way longer than most traders would prefer them to.</p>\n<p>Analyzing this from the perspective of bullish and bearish candles, <strong>bearish sentiments would be represented by red candles</strong>, as well.</p>\n<p>Okay, but on the topic of why is it called bullish and bearish, what does this whole thing have to do with bears? Well, as with many things in crypto, the answer is volatile. <em>It depends on who you are going to ask!</em> It’s because there are several explanations about the origins of this term.</p>\n<p>Some speculate that it has to do with times when traders would sell bearskins for speculative prices before they even received them from the trappers, thus participating in risky deals. But the most common explanation is that <strong>the term “bear market” derives from the way bears, the animals, attack their prey</strong>. They do so by swiping their paws downwards. And when everything in the market is going <em>“downwards,”</em> you know you’re in the middle of a bear market.</p>\n<p>To illustrate what a bear market looks like in reality, we can take a look at the first months of 2018. It’s the period when the world observed <a href=https://www.bitdegree.org/"/cryptocurrency-prices/bitcoin-btc-price/">Bitcoin’s price</strong></a> fall from almost $20,000 to below $6,000.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: January 2018.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-02.jpg/" alt=\"What is bullish and bearish: Bitcoin’s price fall from almost $20,000 to below $6,000 on January 2018.\" width=\"1000\" height=\"564\" /></p>\n<p><a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoin, being the forepost of the crypto world, reflected the overall sentiment of the market, as the majority of less significant altcoins suffered losses as well, and traders chose not to invest into crypto as they did before.</p>\n<h2>What is a “Bull Market”?</h2>\n<p>Okay, the next question is what’s the difference between “bearish” and “bullish” patterns?</p>\n<p>“Bullish market” or “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-bull-market/">bull market</strong></a>” refer to the exact opposite of “bear market.” <strong>The crypto market is “bullish” when the coin prices increase</strong>, the general feeling is joyous and enthusiastic. Investors are optimistic about the future performance of particular projects, products, coins, and the entire crypto market, in general. If the numbers on the charts turn green, and stay that way for an extended period of time, traders know they are in a bull market.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: Bull market.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-03.jpg/" alt=\"What is bullish and bearish: Bull market.\" width=\"1000\" height=\"552\" /></p>\n<p>On the topic of why is it called bullish and bearish, just like with the “bear market,” <strong>the expressions “bull” and “bullish” come from the way a bull charges</strong>. When in attack mode, a bull thrusts its horns up into the air, which poetically resembles the upwards trend of the price increase during a prolonged period of time, be it the price of cryptocurrencies, stocks, securities, or other forms of investment.</p>\n<p>And, in regards to bullish and bearish candles, <strong>bullish sentiments would be associated with green candlesticks</strong>, in the charts.</p>\n<p>A good example of a real-life bullish market could be the time before the 2018 bearish market kicked in. It took place in the second half of 2017, and, as mentioned before, it was characterized by the constant rise of Bitcoin’s value.</p>\n<p>Eventually, one Bitcoin was worth almost $20,000. The entire industry rejoiced; enthusiasm and optimism were all over the place, as investors were eager to invest in new up-and-coming projects, as well as in the already-established industry giants.</p>\n<h2>What Signs Tell Us We’re in a Bear Market?</h2>\n<p>Okay, now you know what is bullish and bearish. However, that was the theory. <em>Let’s get practical</em>. Let’s talk about what signs traders should look for in order to recognize what the current condition of the current market is, and what are the bullish and bearish patterns that traders should be aware of. First of all, let’s discuss <strong>what signs give away that a market is going through a bear phase</strong>.</p>\n<p>As mentioned before, <strong>the downwards trend</strong> is the essential characteristic of a bearish market. Everything goes down. In other words, you can see a decrease in most of the indicators.</p>\n<p>First of all, it’s the decrease in crypto prices. If the majority of the coins continue losing their value, and this doesn’t stop for a long time, it’s clearly an indicator that the market is turning, or already is, bearish.</p>\n<p>Another important indicator is <strong>the decrease in overall crypto trading volume</strong>. <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-volume/">Trading volume</strong></a> in crypto refers to the total amount of crypto that’s being traded actively. To put it in simple words, trading volume is a term used to describe all the buying and selling activities that take place during a certain period of time. So, if the trading volume is continuously decreasing, this could very much mean that the bearish market is here.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: FUD.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-04.jpg/" alt=\"What is bullish and bearish: FUD.\" width=\"1000\" height=\"591\" /></p>\n<p>When the prices and trading volume decrease, it naturally leads to a <strong>decrease in overall trading activity</strong>. This means that fewer people want to buy or sell their crypto assets. Such characteristics indicate that <strong>FUD (fear, uncertainty, and doubt)</strong> are taking over the overall market’s sentiment. If you want to know more about how this emotion affects the crypto market, be sure to check <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-fud/">the section about FUD</strong></a>!</p>\n<p>So, when the prices, trading volume, and trading activity decrease, it all is reflected by a decrease in crypto market capitalization. More commonly referred to as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-market-capitalization-market-cap-mcap/">market cap</strong></a>, it’s an index that calculates the size and value of a particular coin, or the entire crypto market, as a whole. Logically, <strong>when everything decreases, the market cap goes down, as well</strong>.</p>\n<p>A decrease measured by different metrics is then accompanied and consolidated by <strong>negative media content</strong>, such as news, columns, or critical comments. The positive sides and developments get overlooked, while the negative ones gain all the attention. This further strengthens the FUD that’s taking over the market, and everyone can feel the bear’s paws gripping the entire industry.</p>\n<h2>What Signs Tell Us We’re in a Bull Market?</h2>\n<p>Moving on, let’s turn to something more positive - <strong>a bull market</strong>. It’s probably not going to come as a surprise that when it comes down to a bullish market, <strong>everything is the exact opposite of a bear market</strong>. The main characteristic of a bull market could be summed up in one word: <em>“Increase.”</em></p>\n<p>Increase in cryptocurrency prices, increase in crypto trading volume, increase in trading activity, and in the overall crypto market capitalization. It’s something that’s quite evident when you’re learning about what is bullish and bearish in crypto, especially.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish:\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-05.jpg/" alt=\"What is bullish and bearish: The feeling of optimism during bull market.\" width=\"1000\" height=\"532\" /></p>\n<p><strong>This evokes a feeling of optimism</strong>, not only among traders, but investors, as well. If you hear more and more news about various projects receiving funding, this sends a signal that confidence has entered the room. This means that <strong>investors feel safe</strong> <strong>enough</strong> to choose riskier projects to invest their money into.</p>\n<p>In a bear market, investors usually opt for investing in assets that are considered <em>“safe havens”, </em>such as gold, government bonds, or, in the context of crypto, <strong><a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoin and <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum.
/nWhen optimism and confidence enter the market, investors feel like they can take a risk, and go for something less safe, such as a niche altcoin, or a less-known DeFi project. The main thing is that <strong>the money is coming into the market</strong>, and it further fuels the general optimism, and accelerates the bullish mood.</p>\n<h2>What Causes a Market to Turn Bullish or Bearish?</h2>\n<p>Moving further, it’s time to talk about <strong>what can suddenly trigger a market to change</strong>. In order for the entire market to go through a large change, massively important events have to take place.</p>\n<p><strong>Economic data plays a crucial role</strong> in how the market is going to look in the near future. For example, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-inflation/">inflation rate</strong></a> is something that traders must not ignore. Whenever inflation is on the rise, it signals that the Central banks may begin implementing harsher monetary policies, such as hiking up the interest rates.</p>\n<p>An increase in interest rates means that economic activity is about to decrease, and investors and traders may begin hesitating before investing in more-volatile projects or assets.</p>\n<p>Another crucial factor could be <strong>geopolitical events or natural disasters</strong>. A war, a terrorist attack, political instability, and similar events definitely add to the volatility and uncertainty in the crypto market. But sometimes, things happen in an unexpected manner.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is bullish and bearish: Market.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-bullish-and-bearish-06.jpg/" alt=\"What is bullish and bearish: Market.\" width=\"1000\" height=\"503\" /></p>\n<p>For example, <strong>when the war in Ukraine broke out</strong>, the market’s reaction was ambiguous. Some investors realized that Bitcoin, unlike local currencies, can be regarded as a safe haven, since it’s not affected by national boundaries. Therefore, despite the growing uncertainty, Bitcoin didn’t take a noticeable hit, and the market didn’t dive into a bearish phase.</p>\n<p>Finally, I’ve got to mention <strong>the crypto industry itself</strong>. Positive updates and news may lead to, or consolidate the bullish sentiment. While negative news, on the other hand, can be detrimental. And if the news comes out from something big and important within the industry, it can cause a domino effect, which could then result in everything turning bearish very quickly.</p>\n<p>A recent example could be <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/news/ceo-terraform-suggests-a-plan-to-save-ust-from-mass-destruction/">the collapse of the Terra Luna ecosystem</strong></a>. In 2022, <a href=https://www.bitdegree.org/"/cryptocurrency-prices/terrausd-ust-price/">UST and <a href=https://www.bitdegree.org/"/cryptocurrency-prices/terra-luna-luna-price/">LUNA, two interconnected coins issued by the same company, suddenly malfunctioned. In the course of 2 days, <strong>the LUNA coin went from $120 to $0.02</strong>, thus triggering a massive sell-off, and a wave of panic amongst investors.</p>\n<p>It’s estimated that as a direct result of this event, $60 billion evaporated from the crypto space. <strong>It created FUD, and threw the crypto market into its bearish phase</strong> that hasn’t yet passed, almost one year after the Terra Luna events.</p>\n<h2>Wrapping Up</h2>\n<p>Having said that, it’s time to wrap things up! I hope that, by now, you have learned what is “bullish” and “bearish” when it comes to crypto, what are their key differences, and how important it is for every trader to be able to tell them apart!</p>\n<p>The topic is, admittedly, rather expansive - <strong>we haven’t even gotten to the technical side of things</strong>, such as covering bullish and bearish candles! However, I will not go into more detail about the technical side in this section as there is so much to cover...</p>\n<p>Make sure to check out other sections in this <strong>Crypto 101 Handbook</strong> to find out more about it, and the crypto world, as a whole!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-bullish-and-bearish","youtube_video":null},"prevSection":{"id":21,"featured_image_id":6555,"original_id":null,"youtube_video_id":23,"author_id":40,"translator_id":null,"chapter_id":7,"title":"How to Spot and Avoid Rug Pulls?","slug":"how-to-avoid-rug-pulls-in-crypto","definition":"Did you know that OneCoin, which stole more than $4 billion from investors, is one the biggest rug pulls in the crypto market's history?","status":"published","content":"<p>In this section, I’m going to tell you how to avoid rug pulls in crypto!</p>\n<p>Have you or your friends ever been “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-rug-pull/">rug-pulled”? Have you ever come across an enticing crypto project that offered otherworldly returns, only to eventually find out that it was a scam all along? </p>\n<p>As cryptocurrencies become more and more popular, there’s <strong>an ever-increasing</strong> number of rug pulls happening, as well. This is why it’s super-important to be able to spot a potential rug pull before it happens, so that you wouldn’t lose out on your entire investment!</p>\n<p>In this section, we’re going to cover rug pulls. Specifically, I’ll tell you how you can spot a potential rug pull, and what measures you can take to avoid it!</p>\n<p>Let’s get to it!</p>\n<h2>What is a Rug Pull?</h2>\n<p>If you’re new to rug pulls, in general, and haven’t got the slightest clue of what they are, you should stop everything you’re doing now, and go read the section dedicated to <a href=https://www.bitdegree.org/"/crypto/learn/what-is-a-rug-pull-in-crypto/">rug pulls</strong></a>. I won’t go in-depth on what a rug pull is here, since this section is meant to serve as a continuation to that other one I’ve just mentioned.</p>\n<p>To keep it short, a rug pull is a type of <strong>a crypto scam</strong>. Rug pulls happen when project developers or owners run away with the investors’ funds - in other words, investors get “the rug swept out from under their feet”. That’s where the term came from!</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: What is a rug pull?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-1.o.jpg/" alt=\"How to avoid rug pulls in crypto: What is a rug pull?\" width=\"1000\" height=\"435\" /></p>\n<p>As I’ve already told you above, with crypto becoming more and more popular, there’s a surge in rug-pulling activities, as well. Never before has it been so crucial to learn to protect yourself from the various scams floating around the internet!</p>\n<p>This is even more so true when you consider the fact that there are multiple different rug pulling techniques that these scammers employ. Don’t worry, though - no matter how many different ways they might come up with scamming investors, the methods of how to spot and avoid a potential rug pull always remain the same.</p>\n<h2>How to Spot and Avoid a Potential Rug Pull?</h2>\n<p>Continuing on with the section, let’s take a look at 5 of <strong>the most common</strong> signs that a project could be a potential rug pull in the making. If you notice any of these signs, you should be cautious - if you notice all of them, well… I don’t think I even need to say it out loud!</p>\n<p>Do keep in mind that just as these signs could signal a potential crypto project rug pull in the making, the same is true for <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-non-fungible-token-nft/">NFT projects, as well. Many of these same signs should be examined and looked into, when you’re trying to find out how to avoid an NFT rug pull.</p>\n<h3>General Outlook / Social Authority</h3>\n<p>So, for starters, when you’re looking into a crypto project, you should first examine the project from afar. What I mean by that is how do they do their marketing? Is there a legitimate community that believes in the project and its purpose? Or are mainstream celebrities and high-profile YouTubers talking about it?</p>\n<p>Most legitimate projects aren’t going to do sponsored videos from <strong>YouTubers</strong>, or social media posts from celebrities. That’s because they know that a) it looks fishy, and b) neither those celebrities, nor the YouTubers likely know anything about crypto, or at least the project that they would be promoting.</p>\n<p>As you can imagine, in this scenario, the whole entire ordeal would come off as rather disingenuous! Solid and well-designed projects don’t tend to go out of their way, and search for non-related, high-profile names to promote them. Instead, all of the marketing is done by the actual company or team behind the project, and the community that they’ve managed to attract.</p>\n<p>So, in short, the very first sign that a project might be a potential rug pull is if you notice that there are suddenly a lot of<strong> high-profile people</strong>, who would otherwise have nothing to do with crypto, talking about a specific new <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-coin/">coin or <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token.
/nI have to say, though, this can get tricky, since sometimes, the actual influencer is the bad guy. If you want an example of what an alleged rug pull looks like, one of the most recent high-profile cases would be that of the streamer Ice Poseidon, and the CxCoin.</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: General outlook / social authority.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-2.o.jpg/" alt=\"How to avoid rug pulls in crypto: General outlook / social authority.\" width=\"1000\" height=\"384\" /></p>\n<p>Paul Denino - better known online as Ice Poseidon - had created and advertised a platform for content creators, where they could get paid in cryptocurrencies. Then, after investments started flocking in, he took almost all of the money out of the project, and appears to be quite shameless about it!</p>\n<p>This just goes to show that even online stars themselves can allegedly rug their fans. Thus, you should be <strong>very cautious</strong>! </p>\n<h3>Liquidity</h3>\n<p>The second sign that you should look out for, if you want to avoid rug pulls, has to do with project liquidity. It’s a whole huge topic, but what you need to know for now is that a project’s liquidity can definitely tell you a lot, in terms of a potential rug pull!</p>\n<p>If you check out the liquidity of some sort of a new project (or, token), and see that it’s very low, that’s already a red flag. Projects that have liquidity up to around $100k are often seen as being very easy to manipulate! Think about it yourself - if there are only a few thousand dollars worth of tokens in the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-liquidity-pool/">liquidity pool</strong></a>, the project owners could simply deposit $1000 into the pool, which would artificially increase the price of the token significantly!</p>\n<p>Put simply, if a project has low liquidity, it means two things - that the team behind the project hasn’t invested a lot of their own money into it, and that the price of the token behind the project is very easy to manipulate.</p>\n<p>This actually leads us to the second part of this liquidity-related sign of how to spot a rug pull - <strong>locked liquidity</strong>.</p>\n<p>What this term essentially means is that the team behind a token has locked the liquidity of their project, for a specific period of time, and they won’t be able to access it. This is a good thing!</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: Project liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-3.o.jpg/" alt=\"How to avoid rug pulls in crypto: Project liquidity.\" width=\"1000\" height=\"397\" /></p>\n<p>If developers or project owners lock liquidity, there's a much smaller chance that they’ll rug pull the project, since it becomes much more difficult to do. Of course, there are still ways how scammers are able to do their scamming, but it’s still a point of reassurance!</p>\n<p>Note, however, that the liquidity should be locked for a longer period of time. If it’s locked for a month or even a year, well… That’s nothing, really! It’s as if a thief would come to you, and say - hey, don’t worry, I won’t steal your money… For a month. After that, well - we’ll see.</p>\n<p>Of course, do keep in mind that not all situations are the same - unlocked liquidity isn’t an immediate sign that a project is a rug pull, since there are many <strong>variables to consider</strong>, and many different projects with different goals and mechanics. That being said, if you see that a project hasn’t got locked liquidity, you should be very careful!</p>\n<p>By the way, if you’d like to learn more about liquidity - what that is, how it works, and so on -, you can check out the dedicated section on the topic - <a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">here!
/nToken Allocation</h3>\n<p>The third major thing to look into is token allocation. In other words, you need to check out how many tokens are held in a few of the top <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallets (also known as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-whale/">whales)./n
Thankfully, that’s super-simple to do! There are special services called <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain-explorer/">blockchain explorers</strong></a>. The two most popular ones are <strong>Etherscan and BscScan</strong> - on them, you can enter the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contract</strong></a> address of any project built on the <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum or Binance Smart Chain networks, respectively, and check a list of wallets holding the most project tokens.</p>\n<p><img title=\"How to avoid rug pulls in crypto: Token allocation.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-4.o.jpg/" alt=\"How to avoid rug pulls in crypto: Token allocation.\" width=\"1000\" height=\"596\" /></p>\n<p>If you see that the top 10 wallets hold over 15% or 20% of all of the available tokens, this is a tell-tale sign to stay away from that project! What could happen is the whale wallets could decide to dump all of their tokens into the market, thus crashing the price of the token in a matter of minutes.</p>\n<p>Checking project token allocation is completely free to do, and typically takes only a few minutes. Make sure to do so with all projects that you are planning to invest in! After all, it’s one of the simplest ways of how to spot a rug pull.</p>\n<h3>Check the Project Whitepaper - Roadmap</h3>\n<p>Number four has to do with the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-whitepaper/">Whitepaper of the project.</p>\n<p>Imagine a friend came to you, and told you about “this amazing new company” that he invested money into, and he suggested you do the same. Well, before going out there and putting your money into that company, you would probably try to do some <strong>research</strong> on what it is that they do! Part of your research would surely include looking into the company’s mission statement, its <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-roadmap/">roadmap, and so on.</p>\n<p>Well, cryptocurrency projects are the same! If you want to avoid getting rugged, checking out the project’s Whitepaper or its roadmap is essential!</p>\n<p>Many rug pulls in the making don’t have solid Whitepapers. Instead, they are filled with random crypto buzzwords, and are usually very short. If you read through the Whitepaper, and come out understanding less than you did before checking it out, that’s a clear sign to stay away from the project!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How to avoid rug pulls in crypto: Check the project Whitepaper - Roadmap.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-5.o.jpg/" alt=\"How to avoid rug pulls in crypto: Check the project Whitepaper - Roadmap.\" width=\"1000\" height=\"601\" /></p>\n<p>Whitepapers are also a great way to get to know what the project is all about. A good rule of thumb for you to follow is this - if the Whitepaper looks like a sales pitch, and appeals to your emotions (in other words, desperately tries to sell you something), it shouldn’t be taken seriously, at all.</p>\n<h3>“I’ve Seen This Before”</h3>\n<p>Now, the fifth and final method of how to avoid a crypto rug pull is something I like to call “I’ve seen this before…”. You should imagine me saying this with a really suspicious expression on my face.</p>\n<p>So basically, it’s pretty simple - if you feel like you’ve seen this exact project model a few times already, you might be getting rugged. That’s because most scammers don’t bother with creating a new and enticing project - instead, they simply <strong>copy-paste the code</strong> from another project, and only change a few variables, such as the name of the token.</p>\n<p>This is true both with the way that the project is presented, as well as the code behind it. If you know what you’re doing, and where to look, you could basically “create” (or copy) a “new” cryptocurrency project in a matter of hours, if not minutes.</p>\n<p>That sounds very dangerous if you’re an investor. However, it’s also a good thing, since it makes picking and choosing the right crypto project for yourself much simpler!</p>\n<p>If you feel like you’ve already read that Whitepaper a few times before, or have seen this exact same marketing gimmick, again and again, you should probably avoid investing in the project, since it might end up being a rug pull.</p>\n<h2>Conclusion</h2>\n<p>There are various other ways how you can spot and avoid rug pulls, but I’ve told you about five of the most <strong>common and notable</strong> methods. If you spot any of these within a project, or are simply feeling that something isn’t quite right, you should avoid investing your money into it - this will potentially save you from a huge headache in the long run!</p>","meta_title":"How to Avoid Rug Pulls in Crypto: 5 Ways Explained","meta_description":"Wondering how to be safe from rug pull scams? In this section, you'll find 5 explained ways & examples of how to spot & avoid rug pulls.","meta_keywords":"how to avoid rug pull crypto, how to spot a rug pull, how to spot a rug pull nft, rug pull scam, what is a rug pull in crypto, rug pull definition, crypto rug pull examples, how does a rug pull work","order":10,"language":"en","created_at":"2022-05-04T07:23:35.000000Z","updated_at":"2023-04-24T13:41:44.000000Z","modified_content":"<p>In this section, I’m going to tell you how to avoid rug pulls in crypto!</p>\n<p>Have you or your friends ever been “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-rug-pull/">rug-pulled”? Have you ever come across an enticing crypto project that offered otherworldly returns, only to eventually find out that it was a scam all along? </p>\n<p>As cryptocurrencies become more and more popular, there’s <strong>an ever-increasing</strong> number of rug pulls happening, as well. This is why it’s super-important to be able to spot a potential rug pull before it happens, so that you wouldn’t lose out on your entire investment!</p>\n<p>In this section, we’re going to cover rug pulls. Specifically, I’ll tell you how you can spot a potential rug pull, and what measures you can take to avoid it!</p>\n<p>Let’s get to it!</p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)\"\n title=\"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: How to Spot and Avoid Rug Pulls?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"How to Spot and Avoid Rug Pulls?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"tNPU6AY4o74\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">How to Avoid Rug Pulls in Crypto? (5 Ways Explained)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/tNPU6AY4o74/hq720.jpg/"/n alt=\"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)\"\n title=\"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"tNPU6AY4o74\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is a Rug Pull?</h2>\n<p>If you’re new to rug pulls, in general, and haven’t got the slightest clue of what they are, you should stop everything you’re doing now, and go read the section dedicated to <a href=https://www.bitdegree.org/"/crypto/learn/what-is-a-rug-pull-in-crypto/">rug pulls</strong></a>. I won’t go in-depth on what a rug pull is here, since this section is meant to serve as a continuation to that other one I’ve just mentioned.</p>\n<p>To keep it short, a rug pull is a type of <strong>a crypto scam</strong>. Rug pulls happen when project developers or owners run away with the investors’ funds - in other words, investors get “the rug swept out from under their feet”. That’s where the term came from!</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: What is a rug pull?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-1.o.jpg/" alt=\"How to avoid rug pulls in crypto: What is a rug pull?\" width=\"1000\" height=\"435\" /></p>\n<p>As I’ve already told you above, with crypto becoming more and more popular, there’s a surge in rug-pulling activities, as well. Never before has it been so crucial to learn to protect yourself from the various scams floating around the internet!</p>\n<p>This is even more so true when you consider the fact that there are multiple different rug pulling techniques that these scammers employ. Don’t worry, though - no matter how many different ways they might come up with scamming investors, the methods of how to spot and avoid a potential rug pull always remain the same.</p>\n<h2>How to Spot and Avoid a Potential Rug Pull?</h2>\n<p>Continuing on with the section, let’s take a look at 5 of <strong>the most common</strong> signs that a project could be a potential rug pull in the making. If you notice any of these signs, you should be cautious - if you notice all of them, well… I don’t think I even need to say it out loud!</p>\n<p>Do keep in mind that just as these signs could signal a potential crypto project rug pull in the making, the same is true for <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-non-fungible-token-nft/">NFT projects, as well. Many of these same signs should be examined and looked into, when you’re trying to find out how to avoid an NFT rug pull.</p>\n<h3>General Outlook / Social Authority</h3>\n<p>So, for starters, when you’re looking into a crypto project, you should first examine the project from afar. What I mean by that is how do they do their marketing? Is there a legitimate community that believes in the project and its purpose? Or are mainstream celebrities and high-profile YouTubers talking about it?</p>\n<p>Most legitimate projects aren’t going to do sponsored videos from <strong>YouTubers</strong>, or social media posts from celebrities. That’s because they know that a) it looks fishy, and b) neither those celebrities, nor the YouTubers likely know anything about crypto, or at least the project that they would be promoting.</p>\n<p>As you can imagine, in this scenario, the whole entire ordeal would come off as rather disingenuous! Solid and well-designed projects don’t tend to go out of their way, and search for non-related, high-profile names to promote them. Instead, all of the marketing is done by the actual company or team behind the project, and the community that they’ve managed to attract.</p>\n<p>So, in short, the very first sign that a project might be a potential rug pull is if you notice that there are suddenly a lot of<strong> high-profile people</strong>, who would otherwise have nothing to do with crypto, talking about a specific new <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-coin/">coin or <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token.
/nI have to say, though, this can get tricky, since sometimes, the actual influencer is the bad guy. If you want an example of what an alleged rug pull looks like, one of the most recent high-profile cases would be that of the streamer Ice Poseidon, and the CxCoin.</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: General outlook / social authority.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-2.o.jpg/" alt=\"How to avoid rug pulls in crypto: General outlook / social authority.\" width=\"1000\" height=\"384\" /></p>\n<p>Paul Denino - better known online as Ice Poseidon - had created and advertised a platform for content creators, where they could get paid in cryptocurrencies. Then, after investments started flocking in, he took almost all of the money out of the project, and appears to be quite shameless about it!</p>\n<p>This just goes to show that even online stars themselves can allegedly rug their fans. Thus, you should be <strong>very cautious</strong>! </p>\n<h3>Liquidity</h3>\n<p>The second sign that you should look out for, if you want to avoid rug pulls, has to do with project liquidity. It’s a whole huge topic, but what you need to know for now is that a project’s liquidity can definitely tell you a lot, in terms of a potential rug pull!</p>\n<p>If you check out the liquidity of some sort of a new project (or, token), and see that it’s very low, that’s already a red flag. Projects that have liquidity up to around $100k are often seen as being very easy to manipulate! Think about it yourself - if there are only a few thousand dollars worth of tokens in the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-liquidity-pool/">liquidity pool</strong></a>, the project owners could simply deposit $1000 into the pool, which would artificially increase the price of the token significantly!</p>\n<p>Put simply, if a project has low liquidity, it means two things - that the team behind the project hasn’t invested a lot of their own money into it, and that the price of the token behind the project is very easy to manipulate.</p>\n<p>This actually leads us to the second part of this liquidity-related sign of how to spot a rug pull - <strong>locked liquidity</strong>.</p>\n<p>What this term essentially means is that the team behind a token has locked the liquidity of their project, for a specific period of time, and they won’t be able to access it. This is a good thing!</p>\n<p style=\"text-align: center;\"><img title=\"How to avoid rug pulls in crypto: Project liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-3.o.jpg/" alt=\"How to avoid rug pulls in crypto: Project liquidity.\" width=\"1000\" height=\"397\" /></p>\n<p>If developers or project owners lock liquidity, there's a much smaller chance that they’ll rug pull the project, since it becomes much more difficult to do. Of course, there are still ways how scammers are able to do their scamming, but it’s still a point of reassurance!</p>\n<p>Note, however, that the liquidity should be locked for a longer period of time. If it’s locked for a month or even a year, well… That’s nothing, really! It’s as if a thief would come to you, and say - hey, don’t worry, I won’t steal your money… For a month. After that, well - we’ll see.</p>\n<p>Of course, do keep in mind that not all situations are the same - unlocked liquidity isn’t an immediate sign that a project is a rug pull, since there are many <strong>variables to consider</strong>, and many different projects with different goals and mechanics. That being said, if you see that a project hasn’t got locked liquidity, you should be very careful!</p>\n<p>By the way, if you’d like to learn more about liquidity - what that is, how it works, and so on -, you can check out the dedicated section on the topic - <a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">here!
/nToken Allocation</h3>\n<p>The third major thing to look into is token allocation. In other words, you need to check out how many tokens are held in a few of the top <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallets (also known as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-whale/">whales)./n
Thankfully, that’s super-simple to do! There are special services called <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain-explorer/">blockchain explorers</strong></a>. The two most popular ones are <strong>Etherscan and BscScan</strong> - on them, you can enter the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contract</strong></a> address of any project built on the <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum or Binance Smart Chain networks, respectively, and check a list of wallets holding the most project tokens.</p>\n<p><img title=\"How to avoid rug pulls in crypto: Token allocation.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-4.o.jpg/" alt=\"How to avoid rug pulls in crypto: Token allocation.\" width=\"1000\" height=\"596\" /></p>\n<p>If you see that the top 10 wallets hold over 15% or 20% of all of the available tokens, this is a tell-tale sign to stay away from that project! What could happen is the whale wallets could decide to dump all of their tokens into the market, thus crashing the price of the token in a matter of minutes.</p>\n<p>Checking project token allocation is completely free to do, and typically takes only a few minutes. Make sure to do so with all projects that you are planning to invest in! After all, it’s one of the simplest ways of how to spot a rug pull.</p>\n<h3>Check the Project Whitepaper - Roadmap</h3>\n<p>Number four has to do with the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-whitepaper/">Whitepaper of the project.</p>\n<p>Imagine a friend came to you, and told you about “this amazing new company” that he invested money into, and he suggested you do the same. Well, before going out there and putting your money into that company, you would probably try to do some <strong>research</strong> on what it is that they do! Part of your research would surely include looking into the company’s mission statement, its <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-roadmap/">roadmap, and so on.</p>\n<p>Well, cryptocurrency projects are the same! If you want to avoid getting rugged, checking out the project’s Whitepaper or its roadmap is essential!</p>\n<p>Many rug pulls in the making don’t have solid Whitepapers. Instead, they are filled with random crypto buzzwords, and are usually very short. If you read through the Whitepaper, and come out understanding less than you did before checking it out, that’s a clear sign to stay away from the project!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How to avoid rug pulls in crypto: Check the project Whitepaper - Roadmap.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pull-5.o.jpg/" alt=\"How to avoid rug pulls in crypto: Check the project Whitepaper - Roadmap.\" width=\"1000\" height=\"601\" /></p>\n<p>Whitepapers are also a great way to get to know what the project is all about. A good rule of thumb for you to follow is this - if the Whitepaper looks like a sales pitch, and appeals to your emotions (in other words, desperately tries to sell you something), it shouldn’t be taken seriously, at all.</p>\n<h3>“I’ve Seen This Before”</h3>\n<p>Now, the fifth and final method of how to avoid a crypto rug pull is something I like to call “I’ve seen this before…”. You should imagine me saying this with a really suspicious expression on my face.</p>\n<p>So basically, it’s pretty simple - if you feel like you’ve seen this exact project model a few times already, you might be getting rugged. That’s because most scammers don’t bother with creating a new and enticing project - instead, they simply <strong>copy-paste the code</strong> from another project, and only change a few variables, such as the name of the token.</p>\n<p>This is true both with the way that the project is presented, as well as the code behind it. If you know what you’re doing, and where to look, you could basically “create” (or copy) a “new” cryptocurrency project in a matter of hours, if not minutes.</p>\n<p>That sounds very dangerous if you’re an investor. However, it’s also a good thing, since it makes picking and choosing the right crypto project for yourself much simpler!</p>\n<p>If you feel like you’ve already read that Whitepaper a few times before, or have seen this exact same marketing gimmick, again and again, you should probably avoid investing in the project, since it might end up being a rug pull.</p>\n<h2>Conclusion</h2>\n<p>There are various other ways how you can spot and avoid rug pulls, but I’ve told you about five of the most <strong>common and notable</strong> methods. If you spot any of these within a project, or are simply feeling that something isn’t quite right, you should avoid investing your money into it - this will potentially save you from a huge headache in the long run!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/how-to-avoid-rug-pulls-in-crypto","youtube_video":{"id":23,"channel_id":1,"sort":39,"video_title":"How to Avoid Rug Pulls in Crypto? (5 Ways Explained)","description":"How to avoid rug pulls in crypto?\n\nCryptocurrency rug pulls are very common these days. Thus, crypto enthusiasts and investors should educate themselves on how they could spot and avoid rug pulls, both when it comes to crypto projects, as well as NFTs.\n\nIn this video, I will tell you all about it! Specifically, I’ll quickly run you through what a rug pull is, in regards to crypto, and what a typical rug pull looks like. Then, we’ll take a look at five of the best and most-effective ways to spot a potential rug pull in the making.\n\nHave you ever been rug-pulled? Or maybe you’ve spotted some projects that have all of the red flags associated with rug pulls? Do share your experiences in the comment section down below!\n\nVideo Time Table:\n\n0:00 Introduction to How to Avoid Rug Pulls in Crypto\n0:47 What is a Rug Pull?\n1:41 How to Spot and Avoid a Potential Rug Pull?\n2:06 General Outlook / Social Authority\n3:40 Project Liquidity\n5:37 Token Allocation\n6:32 Check the Project's Whitepaper / Roadmap\n7:30 I've Seen This Before\n8:30 Wrap-up: How to Avoid Rug Pulls in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#CryptoFinallyExplained #HowtoAvoidRugPullCrypto #HowtoSpotaRugPull","video_id":"tNPU6AY4o74","duration":536,"view_count":667,"thumbnail_url":"https://i.ytimg.com/vi/tNPU6AY4o74/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-05-02 20:22:09","created_at":"2022-05-02T23:00:01.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"chapterTitle":"Trading & Investing","cryptoBookSection":{"id":16,"featured_image_id":6526,"original_id":null,"youtube_video_id":16,"author_id":42,"translator_id":null,"chapter_id":7,"title":"The Key Legal Techniques of Avoiding Crypto Taxes","slug":"how-to-avoid-crypto-taxes","definition":"Packing up the things and moving to another country to avoid crypto taxes? Sure, that's an option, but there are more convenient ways.","status":"published","content":"<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">In this section, I will tell you <strong>how you can avoid paying cryptocurrency taxes, legally!</strong></span></p>\n<p>Taxes aren’t a fun topic, for anyone. It’s often complicated and convoluted - however, they are also mandatory to be paid, for everyone. That being said, there are a few different ways of how you could avoid paying cryptocurrency taxes, or at least lower the amount that you would need to pay, in the first place.</p>\n<p>Now, I do have to point this out - when I say “avoid paying taxes”, I’m only talking about the <strong>100% legal methods</strong> of doing so. Furthermore, <strong>none of the information</strong> <strong>in this section should be taken as tax advice</strong> - it’s simply me sharing some interesting insights into the tax system, and the loopholes found within.</p>\n<p>In this section, I will tell you what are the crypto tax laws in the United States, and how you can avoid cryptocurrency taxes, legally.</p>\n<p>Let’s get to it!</p>\n<h2>What are Crypto Taxes?</h2>\n<p>In the US, the institution responsible for collecting taxes is called the IRS, or the <strong>Internal Revenue Service.</strong> Every year, residents of the country need to pay their taxes to the IRS - cryptocurrency taxes included.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-1.o.jpg/" alt=\"How to avoid crypto taxes: What are crypto taxes?\" width=\"1000\" height=\"500\" /></p>\n<p>In order to continue, you need to understand one fundamental term - <strong>capital gains.</strong></p>\n<p>So, imagine that you’ve bought a car, in January. Throughout the year, the value of that car increased, due to the manufacturer putting out a statement that this specific model would be discontinued. Now, if you choose to keep the car, you’re all good - no need to pay anything to the IRS.</p>\n<p>However, if you do end up SELLING the car, for more money than you’ve bought it for, <strong>the profit will be considered as capital gains.</strong> These gains are then taxed by the IRS.</p>\n<p>Cryptocurrency taxes work the exact same way. If you bought <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin for, say, $1000, and by the end of the year your BTC is now worth $1500, selling it will impose a capital gains tax for that $500 - simple maths!</p>\n<p>This is actually where the very first loophole of avoiding crypto taxes comes in - <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-hodl/">HODLing. </strong>Don’t want to pay taxes? <strong>Just don’t sell your Bitcoin!</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How to avoid crypto taxes: HODLing.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-2-6274b2397bd8a.o.jpg/" alt=\"How to avoid crypto taxes: HODLing.\" width=\"1000\" height=\"560\" /></strong></p>\n<p>If you choose to hold your cryptocurrencies, no matter how much the value would increase throughout the year, you won’t need to pay any taxes on them. The capital gains tax is only imposed when you choose to make a sale.</p>\n<p>In addition to capital gains taxes, you should also be aware of the fact that <strong>trading crypto is considered a taxable event</strong> in the eyes of the IRS, as well. So, if you take your Bitcoin, and trade it for <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">Ethereum, this transaction will be taxed, at the end of the year.</p>\n<p>The taxes for this type of a transaction will be calculated at the moment the trade is made. So, let’s say, you trade $100 worth of BTC for $100 worth of ETH in April. Now, the cryptocurrency market experiences a price crash towards the end of the year, and the same amount of ETH is now worth $20. Well, you will still need to pay taxes as if it would be worth $100, since the tax was calculated when you made the trade!</p>\n<p>How will the IRS know that you’ve made this trade? Well, if you trade on centralized exchanges, such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/binance/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Binance</strong></a> <strong>or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/coinbase/" target=\"_blank\" rel=\"nofollow noindex noopener\">Coinbase</a></strong>, your activity will be <strong>automatically reported to the IRS.</strong> If you perform the trade on a decentralized exchange, such as <strong>Uniswap</strong>, it’s up to you to report your trades to the financial institution, instead.</p>\n<p><em>What happens if you choose NOT to report these trades?</em> Well, for starters, that’s illegal, and you might get in a lot of trouble for doing so. With crypto tracking becoming increasingly more advanced, the risk for avoiding taxes this way is getting much higher, as well!</p>\n<p>Going back to the capital gains tax, that’s actually a way of how you can lower your taxes, as you sell your crypto - it’s called a <strong>long-term capital gains tax. </strong>You see, this is a benefit of HODLing, for some time - if you hold and don’t sell your cryptocurrencies for at least a year after you acquire them, your capital gains taxes will be much smaller!</p>\n<p>In order to understand this better, you need to first understand the difference between short and long-term capital gains taxes.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-3.o.jpg/" alt=\"How to avoid crypto taxes: Capital gains tax.\" width=\"1000\" height=\"350\" /></p>\n<p><strong>The short-term capital gains tax</strong> is imposed if you hold your asset - say, your Bitcoin - for a short period of time, and then sell it. If this is done in the same tax year, then it’s considered to be a short-term capital gain. Naturally, though, there are various details surrounding the process, and you should always do in-depth research of your own, before making any decisions - this isn’t tax advice, mind you!</p>\n<p><strong>Long-term capital gains taxes</strong> apply to people who choose to hold their assets, <em>well… </em>Long-term! In many cases, the “long-term” constitutes a time period of over a year. So, if you do end up holding your Bitcoin for over a year, your capital gains tax would become much lower.</p>\n<p>The actual tax rate will depend on your yearly income. However, in many cases, the long-term capital gains tax can be up to half the size of the short-term tax. So, while you will still need to pay taxes, it’ll be much less than what you’d pay the first year around!</p>\n<p>Moving on, another way of how you could avoid cryptocurrency taxes legally is actually one that’s unfortunately familiar to a lot of crypto investors. In order to not have to pay taxes for the year, <strong>your losses need to be higher than your profits.</strong></p>\n<p>So, let’s say, you’ve bought Dogecoin for $100, in the middle of the year. The prices were very volatile, and at some point, you just decided to bite the bullet, and sell off your Doge for $70, with a $30 loss. This loss would then be deductible from your taxes, at the end of the year.</p>\n<p>Naturally, this isn’t an ideal scenario. However, if you do find yourself in a situation like this, there’s at least the condolence of potential taxes being lowered, or negated, in general.</p>\n<p>Next up, one of the more-radical ways of how you can avoid paying crypto taxes legally within the US is by <strong>leaving the country.</strong> Many people who have made a lot of crypto gains choose to travel and live offshore, in countries that have more-favorable tax laws. When it comes to the US, one of the most-popular travel destinations of this kind is <strong>Puerto Rico.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-4.o.jpg/" alt=\"How to avoid crypto taxes: Leaving the country.\" width=\"1000\" height=\"900\" /></strong></p>\n<p>As you can probably agree, this is actually a really extreme measure to take, in order to avoid paying taxes in the States. Do keep in mind, however, that there are additional details surrounding this loophole, too! For starters, in most countries, you will need to spend some time there and register yourself within the country in order for the tax cuts to apply to you.</p>\n<p>Furthermore, if you’ve already been trading cryptocurrencies for some time now, and have managed to accumulate fairly large amounts of wealth thanks to that, you will still need to pay taxes in the United States, even if you do choose to leave the country.</p>\n<p>Moving on, another method of avoiding crypto taxes legally that has been becoming increasingly more popular is <strong>starting a crypto Roth IRA of your own.</strong> Now, this is where I’ll need to get a bit more technical, so do bear with me. And remember - none of this is tax advice, and the material should only be viewed as educational!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-5-6274b2652979d.o.jpg/" alt=\"How to avoid crypto taxes: Individual Retirement Account.\" width=\"1000\" height=\"361\" /></p>\n<p>So, a traditional IRA is an “<strong>Individual Retirement Account</strong>”. The concept is surrounded by a lot of rules and technicalities, but to keep it simple, you should know that an IRA is an investment account that allows you to invest towards your retirement. The major point here is that, until you retire and decide to take the money out, anything that you put in is tax-deductible.</p>\n<p>Now, let’s say that you’ve decided to put $1000 into your IRA. When the time to pay taxes comes around the corner, you will be able to deduct that $1000 from your taxes, in the form of a “loss”. The IRA kind of tells you <em>“hey, don’t pay taxes on that money just yet - you’ll pay us when you take the money out, in the future”.</em></p>\n<p>With a Roth IRA, everything’s the same, except for one, single detail - you pay taxes NOW, and get to take out the money later without paying any taxes on it. So, that $1000 that you invest? Well, it won’t be deducted from your taxes this year, but when that investment grows, and you reach your retirement age and want to take the money out, you <strong>won't be required to pay any taxes.</strong></p>\n<p>So basically, the main difference between the two is that with an IRA, you pay taxes LATER, and with a Roth IRA - you pay them NOW.</p>\n<p>Another point that’s worth mentioning here is that your IRA account <strong>can also be treated as a savings account. </strong>So, you place in money, pay taxes on it that year, and are then able to withdraw that money at any point in time, without paying any more taxes for withdrawals up to the sum that you’ve placed in there, in the first place!</p>\n<p><em>Wow, I admit</em> - IRAs are among the more-complicated aspects of the tax world. To tell you the truth, I’m actually skipping a lot of the details, and only giving you the general picture, so that you could at least understand the fundamentals of the concept.</p>\n<p>All of that leads us to the crypto Roth IRA part. It is possible to set up a <strong>cryptocurrency Roth IRA account </strong>so that you’d be putting your cryptos towards your retirement fund.</p>\n<p>Obviously, there are things to keep in mind here, before doing this. First of all, a crypto Roth IRA would only make sense if you believe that <strong>the value of cryptocurrencies is going to be higher in the future than it is now, </strong>as well as that you’ll be in a higher tax bracket when you retire, as opposed to where you are now.</p>\n<p>However, with a bit of luck and strategic planning, you could actually avoid a lot of potential crypto taxes, by opening up a crypto IRA account!</p>\n<p>One more big method of how you can avoid crypto taxes in a legal manner is loans. Specifically, I’m talking about <strong>taking out a loan in order to buy cryptocurrencies.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-6.o.jpg/" alt=\"How to avoid crypto taxes: Loans.\" width=\"1000\" height=\"268\" /></strong></p>\n<p>When you take out a loan for, say, a car, that car then acts as a backing for your loan. The same is true with crypto - if you take out a loan to buy Bitcoin, that BTC will act as backing for your loan.</p>\n<p>Now, the thing that you buy with your loan money isn’t taxed. So, that BTC that you’ve bought - it’s not subject to being taxed! You can use it (trade it, invest it, and so on), and reap the benefits, without paying any taxes.</p>\n<p>Obviously, this comes with certain risks, and proper research needs to be done in order to not get into financial trouble. Taking out a loan for crypto is actually much simpler than you’d think, but you should <strong>only do so for cryptocurrencies that you truly believe in,</strong> and that are long-term projects!</p>\n<p>Up to this point, we’ve covered a few of the most popular methods of how you could avoid cryptocurrency taxes, completely legally. So, which of these methods seems the most logical one?</p>\n<p>Personally, I believe that the best way to avoid cryptocurrency taxes in a legal manner is to <strong>hold your crypto</strong>, for a long time to come. If you’ve bought coins and tokens that represent projects that you truly believe in, then you will also believe that those assets will rise in price, with time.</p>\n<p>And, with cryptocurrency mass adoption being a hot topic, who knows - maybe crypto taxes will be abolished, altogether, at some point in the future? Or, at the very least, if you hold crypto for a long time, maybe the taxes will get significantly lower than they are now - that’s something to look forward to!</p>","meta_title":"How to Avoid Crypto Taxes in a Legal Way","meta_description":"Trying to find a way how to avoid crypto taxes? You'll definitely find all possible completely legal ways to avoid crypto taxes right here!","meta_keywords":"how to avoid crypto taxes, how to avoid capital gains tax on cryptocurrency, how to not pay taxes on bitcoin, how to avoid taxes on crypto, how is crypto taxed, do you have to pay taxes on crypto","order":11,"language":"en","created_at":"2022-05-03T12:49:47.000000Z","updated_at":"2023-04-24T13:41:44.000000Z","modified_content":"<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">In this section, I will tell you <strong>how you can avoid paying cryptocurrency taxes, legally!</strong></span></p>\n<p>Taxes aren’t a fun topic, for anyone. It’s often complicated and convoluted - however, they are also mandatory to be paid, for everyone. That being said, there are a few different ways of how you could avoid paying cryptocurrency taxes, or at least lower the amount that you would need to pay, in the first place.</p>\n<p>Now, I do have to point this out - when I say “avoid paying taxes”, I’m only talking about the <strong>100% legal methods</strong> of doing so. Furthermore, <strong>none of the information</strong> <strong>in this section should be taken as tax advice</strong> - it’s simply me sharing some interesting insights into the tax system, and the loopholes found within.</p>\n<p>In this section, I will tell you what are the crypto tax laws in the United States, and how you can avoid cryptocurrency taxes, legally.</p>\n<p>Let’s get to it!</p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"How to Avoid Crypto Taxes? (Legal Ways Explained)\"\n title=\"How to Avoid Crypto Taxes? (Legal Ways Explained)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: The Key Legal Techniques of Avoiding Crypto Taxes</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"The Key Legal Techniques of Avoiding Crypto Taxes\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"ERzU_Xz_P-o\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">How to Avoid Crypto Taxes? (Legal Ways Explained)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/ERzU_Xz_P-o/hq720.jpg/"/n alt=\"How to Avoid Crypto Taxes? 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(Legal Ways Explained)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"ERzU_Xz_P-o\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What are Crypto Taxes?</h2>\n<p>In the US, the institution responsible for collecting taxes is called the IRS, or the <strong>Internal Revenue Service.</strong> Every year, residents of the country need to pay their taxes to the IRS - cryptocurrency taxes included.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-1.o.jpg/" alt=\"How to avoid crypto taxes: What are crypto taxes?\" width=\"1000\" height=\"500\" /></p>\n<p>In order to continue, you need to understand one fundamental term - <strong>capital gains.</strong></p>\n<p>So, imagine that you’ve bought a car, in January. Throughout the year, the value of that car increased, due to the manufacturer putting out a statement that this specific model would be discontinued. Now, if you choose to keep the car, you’re all good - no need to pay anything to the IRS.</p>\n<p>However, if you do end up SELLING the car, for more money than you’ve bought it for, <strong>the profit will be considered as capital gains.</strong> These gains are then taxed by the IRS.</p>\n<p>Cryptocurrency taxes work the exact same way. If you bought <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin for, say, $1000, and by the end of the year your BTC is now worth $1500, selling it will impose a capital gains tax for that $500 - simple maths!</p>\n<p>This is actually where the very first loophole of avoiding crypto taxes comes in - <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-hodl/">HODLing. </strong>Don’t want to pay taxes? <strong>Just don’t sell your Bitcoin!</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How to avoid crypto taxes: HODLing.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-2-6274b2397bd8a.o.jpg/" alt=\"How to avoid crypto taxes: HODLing.\" width=\"1000\" height=\"560\" /></strong></p>\n<p>If you choose to hold your cryptocurrencies, no matter how much the value would increase throughout the year, you won’t need to pay any taxes on them. The capital gains tax is only imposed when you choose to make a sale.</p>\n<p>In addition to capital gains taxes, you should also be aware of the fact that <strong>trading crypto is considered a taxable event</strong> in the eyes of the IRS, as well. So, if you take your Bitcoin, and trade it for <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">Ethereum, this transaction will be taxed, at the end of the year.</p>\n<p>The taxes for this type of a transaction will be calculated at the moment the trade is made. So, let’s say, you trade $100 worth of BTC for $100 worth of ETH in April. Now, the cryptocurrency market experiences a price crash towards the end of the year, and the same amount of ETH is now worth $20. Well, you will still need to pay taxes as if it would be worth $100, since the tax was calculated when you made the trade!</p>\n<p>How will the IRS know that you’ve made this trade? Well, if you trade on centralized exchanges, such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/binance/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Binance</strong></a> <strong>or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/goon/coinbase/" target=\"_blank\" rel=\"nofollow noindex noopener\">Coinbase</a></strong>, your activity will be <strong>automatically reported to the IRS.</strong> If you perform the trade on a decentralized exchange, such as <strong>Uniswap</strong>, it’s up to you to report your trades to the financial institution, instead.</p>\n<p><em>What happens if you choose NOT to report these trades?</em> Well, for starters, that’s illegal, and you might get in a lot of trouble for doing so. With crypto tracking becoming increasingly more advanced, the risk for avoiding taxes this way is getting much higher, as well!</p>\n<p>Going back to the capital gains tax, that’s actually a way of how you can lower your taxes, as you sell your crypto - it’s called a <strong>long-term capital gains tax. </strong>You see, this is a benefit of HODLing, for some time - if you hold and don’t sell your cryptocurrencies for at least a year after you acquire them, your capital gains taxes will be much smaller!</p>\n<p>In order to understand this better, you need to first understand the difference between short and long-term capital gains taxes.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-3.o.jpg/" alt=\"How to avoid crypto taxes: Capital gains tax.\" width=\"1000\" height=\"350\" /></p>\n<p><strong>The short-term capital gains tax</strong> is imposed if you hold your asset - say, your Bitcoin - for a short period of time, and then sell it. If this is done in the same tax year, then it’s considered to be a short-term capital gain. Naturally, though, there are various details surrounding the process, and you should always do in-depth research of your own, before making any decisions - this isn’t tax advice, mind you!</p>\n<p><strong>Long-term capital gains taxes</strong> apply to people who choose to hold their assets, <em>well… </em>Long-term! In many cases, the “long-term” constitutes a time period of over a year. So, if you do end up holding your Bitcoin for over a year, your capital gains tax would become much lower.</p>\n<p>The actual tax rate will depend on your yearly income. However, in many cases, the long-term capital gains tax can be up to half the size of the short-term tax. So, while you will still need to pay taxes, it’ll be much less than what you’d pay the first year around!</p>\n<p>Moving on, another way of how you could avoid cryptocurrency taxes legally is actually one that’s unfortunately familiar to a lot of crypto investors. In order to not have to pay taxes for the year, <strong>your losses need to be higher than your profits.</strong></p>\n<p>So, let’s say, you’ve bought Dogecoin for $100, in the middle of the year. The prices were very volatile, and at some point, you just decided to bite the bullet, and sell off your Doge for $70, with a $30 loss. This loss would then be deductible from your taxes, at the end of the year.</p>\n<p>Naturally, this isn’t an ideal scenario. However, if you do find yourself in a situation like this, there’s at least the condolence of potential taxes being lowered, or negated, in general.</p>\n<p>Next up, one of the more-radical ways of how you can avoid paying crypto taxes legally within the US is by <strong>leaving the country.</strong> Many people who have made a lot of crypto gains choose to travel and live offshore, in countries that have more-favorable tax laws. When it comes to the US, one of the most-popular travel destinations of this kind is <strong>Puerto Rico.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-4.o.jpg/" alt=\"How to avoid crypto taxes: Leaving the country.\" width=\"1000\" height=\"900\" /></strong></p>\n<p>As you can probably agree, this is actually a really extreme measure to take, in order to avoid paying taxes in the States. Do keep in mind, however, that there are additional details surrounding this loophole, too! For starters, in most countries, you will need to spend some time there and register yourself within the country in order for the tax cuts to apply to you.</p>\n<p>Furthermore, if you’ve already been trading cryptocurrencies for some time now, and have managed to accumulate fairly large amounts of wealth thanks to that, you will still need to pay taxes in the United States, even if you do choose to leave the country.</p>\n<p>Moving on, another method of avoiding crypto taxes legally that has been becoming increasingly more popular is <strong>starting a crypto Roth IRA of your own.</strong> Now, this is where I’ll need to get a bit more technical, so do bear with me. And remember - none of this is tax advice, and the material should only be viewed as educational!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-5-6274b2652979d.o.jpg/" alt=\"How to avoid crypto taxes: Individual Retirement Account.\" width=\"1000\" height=\"361\" /></p>\n<p>So, a traditional IRA is an “<strong>Individual Retirement Account</strong>”. The concept is surrounded by a lot of rules and technicalities, but to keep it simple, you should know that an IRA is an investment account that allows you to invest towards your retirement. The major point here is that, until you retire and decide to take the money out, anything that you put in is tax-deductible.</p>\n<p>Now, let’s say that you’ve decided to put $1000 into your IRA. When the time to pay taxes comes around the corner, you will be able to deduct that $1000 from your taxes, in the form of a “loss”. The IRA kind of tells you <em>“hey, don’t pay taxes on that money just yet - you’ll pay us when you take the money out, in the future”.</em></p>\n<p>With a Roth IRA, everything’s the same, except for one, single detail - you pay taxes NOW, and get to take out the money later without paying any taxes on it. So, that $1000 that you invest? Well, it won’t be deducted from your taxes this year, but when that investment grows, and you reach your retirement age and want to take the money out, you <strong>won't be required to pay any taxes.</strong></p>\n<p>So basically, the main difference between the two is that with an IRA, you pay taxes LATER, and with a Roth IRA - you pay them NOW.</p>\n<p>Another point that’s worth mentioning here is that your IRA account <strong>can also be treated as a savings account. </strong>So, you place in money, pay taxes on it that year, and are then able to withdraw that money at any point in time, without paying any more taxes for withdrawals up to the sum that you’ve placed in there, in the first place!</p>\n<p><em>Wow, I admit</em> - IRAs are among the more-complicated aspects of the tax world. To tell you the truth, I’m actually skipping a lot of the details, and only giving you the general picture, so that you could at least understand the fundamentals of the concept.</p>\n<p>All of that leads us to the crypto Roth IRA part. It is possible to set up a <strong>cryptocurrency Roth IRA account </strong>so that you’d be putting your cryptos towards your retirement fund.</p>\n<p>Obviously, there are things to keep in mind here, before doing this. First of all, a crypto Roth IRA would only make sense if you believe that <strong>the value of cryptocurrencies is going to be higher in the future than it is now, </strong>as well as that you’ll be in a higher tax bracket when you retire, as opposed to where you are now.</p>\n<p>However, with a bit of luck and strategic planning, you could actually avoid a lot of potential crypto taxes, by opening up a crypto IRA account!</p>\n<p>One more big method of how you can avoid crypto taxes in a legal manner is loans. Specifically, I’m talking about <strong>taking out a loan in order to buy cryptocurrencies.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-crypto-taxes-6.o.jpg/" alt=\"How to avoid crypto taxes: Loans.\" width=\"1000\" height=\"268\" /></strong></p>\n<p>When you take out a loan for, say, a car, that car then acts as a backing for your loan. The same is true with crypto - if you take out a loan to buy Bitcoin, that BTC will act as backing for your loan.</p>\n<p>Now, the thing that you buy with your loan money isn’t taxed. So, that BTC that you’ve bought - it’s not subject to being taxed! You can use it (trade it, invest it, and so on), and reap the benefits, without paying any taxes.</p>\n<p>Obviously, this comes with certain risks, and proper research needs to be done in order to not get into financial trouble. Taking out a loan for crypto is actually much simpler than you’d think, but you should <strong>only do so for cryptocurrencies that you truly believe in,</strong> and that are long-term projects!</p>\n<p>Up to this point, we’ve covered a few of the most popular methods of how you could avoid cryptocurrency taxes, completely legally. So, which of these methods seems the most logical one?</p>\n<p>Personally, I believe that the best way to avoid cryptocurrency taxes in a legal manner is to <strong>hold your crypto</strong>, for a long time to come. If you’ve bought coins and tokens that represent projects that you truly believe in, then you will also believe that those assets will rise in price, with time.</p>\n<p>And, with cryptocurrency mass adoption being a hot topic, who knows - maybe crypto taxes will be abolished, altogether, at some point in the future? Or, at the very least, if you hold crypto for a long time, maybe the taxes will get significantly lower than they are now - that’s something to look forward to!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/how-to-avoid-crypto-taxes","youtube_video":{"id":16,"channel_id":1,"sort":46,"video_title":"How to Avoid Crypto Taxes? (Legal Ways Explained)","description":"How to avoid crypto taxes legally?\n\nCryptocurrency taxes become a hot topic, once a year. They can, admittedly, be very confusing, and difficult to deal with, especially if this is your first time doing your crypto taxes, in general. \n\nIn this video, however, I’ll tell you about all of the best methods of how you can avoid paying cryptocurrency taxes, in a 100% legal manner. While some methods could lower your taxes, others might waive them, altogether!\n\nHave you ever paid taxes on your crypto gains? What was the process like? Share your experiences in the comments below!\n\nVideo Time Table:\n\n0:00 Introduction to How to Avoid Crypto Taxes Legally\n0:59 What are Crypto Taxes?\n1:54 HODLing\n3:16 Capital Gains Tax\n5:09 Leaving the Country\n6:03 Starting a Crypto Roth IRA\n8:27 Getting Out a Loan\n9:17 Wrap-up: How to Avoid Crypto Taxes Legally?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#HowtoAvoidCryptoTaxes #HowtoAvoidCapitalGainsTaxonCryptocurrency #HowtoNotPayTaxesonBitcoin #HowtoAvoidTaxesonCrypto #HowisCryptoTaxed","video_id":"ERzU_Xz_P-o","duration":615,"view_count":663,"thumbnail_url":"https://i.ytimg.com/vi/ERzU_Xz_P-o/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-03-16 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Terms","updated":false,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/crypto-101-glossary.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}],"currentChapter":"trading-and-investing","currentSection":"how-to-avoid-crypto-taxes","readingTime":10,"readingLevel":"medium"},"url":"/crypto/learn/how-to-avoid-crypto-taxes","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0"> Chapter 7: Trading & Investing
The Key Legal Techniques of Avoiding Crypto Taxes
Packing up the things and moving to another country to avoid crypto taxes? Sure, that's an option, but there are more convenient ways.
In this section, I will tell you how you can avoid paying cryptocurrency taxes, legally!
Taxes aren’t a fun topic, for anyone. It’s often complicated and convoluted - however, they are also mandatory to be paid, for everyone. That being said, there are a few different ways of how you could avoid paying cryptocurrency taxes, or at least lower the amount that you would need to pay, in the first place.
Now, I do have to point this out - when I say “avoid paying taxes”, I’m only talking about the 100% legal methods of doing so. Furthermore, none of the information in this section should be taken as tax advice - it’s simply me sharing some interesting insights into the tax system, and the loopholes found within.
In this section, I will tell you what are the crypto tax laws in the United States, and how you can avoid cryptocurrency taxes, legally.
Let’s get to it!
Video Explainer
Video Explainer: The Key Legal Techniques of Avoiding Crypto Taxes
Reading is not your thing? Watch the "The Key Legal Techniques of Avoiding Crypto Taxes" video explainer
What are Crypto Taxes?
In the US, the institution responsible for collecting taxes is called the IRS, or the Internal Revenue Service. Every year, residents of the country need to pay their taxes to the IRS - cryptocurrency taxes included.
In order to continue, you need to understand one fundamental term - capital gains.
So, imagine that you’ve bought a car, in January. Throughout the year, the value of that car increased, due to the manufacturer putting out a statement that this specific model would be discontinued. Now, if you choose to keep the car, you’re all good - no need to pay anything to the IRS.
However, if you do end up SELLING the car, for more money than you’ve bought it for, the profit will be considered as capital gains. These gains are then taxed by the IRS.
Cryptocurrency taxes work the exact same way. If you bought Bitcoin for, say, $1000, and by the end of the year your BTC is now worth $1500, selling it will impose a capital gains tax for that $500 - simple maths!
This is actually where the very first loophole of avoiding crypto taxes comes in - HODLing. Don’t want to pay taxes? Just don’t sell your Bitcoin!
If you choose to hold your cryptocurrencies, no matter how much the value would increase throughout the year, you won’t need to pay any taxes on them. The capital gains tax is only imposed when you choose to make a sale.
In addition to capital gains taxes, you should also be aware of the fact that trading crypto is considered a taxable event in the eyes of the IRS, as well. So, if you take your Bitcoin, and trade it for Ethereum, this transaction will be taxed, at the end of the year.
The taxes for this type of a transaction will be calculated at the moment the trade is made. So, let’s say, you trade $100 worth of BTC for $100 worth of ETH in April. Now, the cryptocurrency market experiences a price crash towards the end of the year, and the same amount of ETH is now worth $20. Well, you will still need to pay taxes as if it would be worth $100, since the tax was calculated when you made the trade!
How will the IRS know that you’ve made this trade? Well, if you trade on centralized exchanges, such as Binance or Coinbase, your activity will be automatically reported to the IRS. If you perform the trade on a decentralized exchange, such as Uniswap, it’s up to you to report your trades to the financial institution, instead.
What happens if you choose NOT to report these trades? Well, for starters, that’s illegal, and you might get in a lot of trouble for doing so. With crypto tracking becoming increasingly more advanced, the risk for avoiding taxes this way is getting much higher, as well!
Going back to the capital gains tax, that’s actually a way of how you can lower your taxes, as you sell your crypto - it’s called a long-term capital gains tax. You see, this is a benefit of HODLing, for some time - if you hold and don’t sell your cryptocurrencies for at least a year after you acquire them, your capital gains taxes will be much smaller!
In order to understand this better, you need to first understand the difference between short and long-term capital gains taxes.
The short-term capital gains tax is imposed if you hold your asset - say, your Bitcoin - for a short period of time, and then sell it. If this is done in the same tax year, then it’s considered to be a short-term capital gain. Naturally, though, there are various details surrounding the process, and you should always do in-depth research of your own, before making any decisions - this isn’t tax advice, mind you!
Long-term capital gains taxes apply to people who choose to hold their assets, well… Long-term! In many cases, the “long-term” constitutes a time period of over a year. So, if you do end up holding your Bitcoin for over a year, your capital gains tax would become much lower.
The actual tax rate will depend on your yearly income. However, in many cases, the long-term capital gains tax can be up to half the size of the short-term tax. So, while you will still need to pay taxes, it’ll be much less than what you’d pay the first year around!
Moving on, another way of how you could avoid cryptocurrency taxes legally is actually one that’s unfortunately familiar to a lot of crypto investors. In order to not have to pay taxes for the year, your losses need to be higher than your profits.
So, let’s say, you’ve bought Dogecoin for $100, in the middle of the year. The prices were very volatile, and at some point, you just decided to bite the bullet, and sell off your Doge for $70, with a $30 loss. This loss would then be deductible from your taxes, at the end of the year.
Naturally, this isn’t an ideal scenario. However, if you do find yourself in a situation like this, there’s at least the condolence of potential taxes being lowered, or negated, in general.
Next up, one of the more-radical ways of how you can avoid paying crypto taxes legally within the US is by leaving the country. Many people who have made a lot of crypto gains choose to travel and live offshore, in countries that have more-favorable tax laws. When it comes to the US, one of the most-popular travel destinations of this kind is Puerto Rico.
As you can probably agree, this is actually a really extreme measure to take, in order to avoid paying taxes in the States. Do keep in mind, however, that there are additional details surrounding this loophole, too! For starters, in most countries, you will need to spend some time there and register yourself within the country in order for the tax cuts to apply to you.
Furthermore, if you’ve already been trading cryptocurrencies for some time now, and have managed to accumulate fairly large amounts of wealth thanks to that, you will still need to pay taxes in the United States, even if you do choose to leave the country.
Moving on, another method of avoiding crypto taxes legally that has been becoming increasingly more popular is starting a crypto Roth IRA of your own. Now, this is where I’ll need to get a bit more technical, so do bear with me. And remember - none of this is tax advice, and the material should only be viewed as educational!
So, a traditional IRA is an “Individual Retirement Account”. The concept is surrounded by a lot of rules and technicalities, but to keep it simple, you should know that an IRA is an investment account that allows you to invest towards your retirement. The major point here is that, until you retire and decide to take the money out, anything that you put in is tax-deductible.
Now, let’s say that you’ve decided to put $1000 into your IRA. When the time to pay taxes comes around the corner, you will be able to deduct that $1000 from your taxes, in the form of a “loss”. The IRA kind of tells you “hey, don’t pay taxes on that money just yet - you’ll pay us when you take the money out, in the future”.
With a Roth IRA, everything’s the same, except for one, single detail - you pay taxes NOW, and get to take out the money later without paying any taxes on it. So, that $1000 that you invest? Well, it won’t be deducted from your taxes this year, but when that investment grows, and you reach your retirement age and want to take the money out, you won't be required to pay any taxes.
So basically, the main difference between the two is that with an IRA, you pay taxes LATER, and with a Roth IRA - you pay them NOW.
Another point that’s worth mentioning here is that your IRA account can also be treated as a savings account. So, you place in money, pay taxes on it that year, and are then able to withdraw that money at any point in time, without paying any more taxes for withdrawals up to the sum that you’ve placed in there, in the first place!
Wow, I admit - IRAs are among the more-complicated aspects of the tax world. To tell you the truth, I’m actually skipping a lot of the details, and only giving you the general picture, so that you could at least understand the fundamentals of the concept.
All of that leads us to the crypto Roth IRA part. It is possible to set up a cryptocurrency Roth IRA account so that you’d be putting your cryptos towards your retirement fund.
Obviously, there are things to keep in mind here, before doing this. First of all, a crypto Roth IRA would only make sense if you believe that the value of cryptocurrencies is going to be higher in the future than it is now, as well as that you’ll be in a higher tax bracket when you retire, as opposed to where you are now.
However, with a bit of luck and strategic planning, you could actually avoid a lot of potential crypto taxes, by opening up a crypto IRA account!
One more big method of how you can avoid crypto taxes in a legal manner is loans. Specifically, I’m talking about taking out a loan in order to buy cryptocurrencies.
When you take out a loan for, say, a car, that car then acts as a backing for your loan. The same is true with crypto - if you take out a loan to buy Bitcoin, that BTC will act as backing for your loan.
Now, the thing that you buy with your loan money isn’t taxed. So, that BTC that you’ve bought - it’s not subject to being taxed! You can use it (trade it, invest it, and so on), and reap the benefits, without paying any taxes.
Obviously, this comes with certain risks, and proper research needs to be done in order to not get into financial trouble. Taking out a loan for crypto is actually much simpler than you’d think, but you should only do so for cryptocurrencies that you truly believe in, and that are long-term projects!
Up to this point, we’ve covered a few of the most popular methods of how you could avoid cryptocurrency taxes, completely legally. So, which of these methods seems the most logical one?
Personally, I believe that the best way to avoid cryptocurrency taxes in a legal manner is to hold your crypto, for a long time to come. If you’ve bought coins and tokens that represent projects that you truly believe in, then you will also believe that those assets will rise in price, with time.
And, with cryptocurrency mass adoption being a hot topic, who knows - maybe crypto taxes will be abolished, altogether, at some point in the future? Or, at the very least, if you hold crypto for a long time, maybe the taxes will get significantly lower than they are now - that’s something to look forward to!
