How to Avoid Rug Pulls in Crypto: 5 Ways Explained

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? (Legal Ways Explained)\"\n title=\"How to Avoid Crypto Taxes? (Legal 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 Crypto Taxes? (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 17:17:36","created_at":"2022-03-16T23:00:02.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"prevSection":{"id":19,"featured_image_id":6532,"original_id":null,"youtube_video_id":18,"author_id":40,"translator_id":null,"chapter_id":7,"title":"What is a Rug Pull in Crypto?","slug":"what-is-a-rug-pull-in-crypto","definition":"Did you know that the developers behind the Squid Game token managed to take off with $3.38 million?","status":"published","content":"<p>In this section, we’re going to cover what is <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-rug-pull/">a rug pull</strong></a>, in crypto!</p>\n<p>Imagine that, one day, while browsing Reddit, you’ve stumbled upon a brand new crypto project - somebody made a post about a token that was just launched a few hours ago. It looks great, and there are multiple people commenting on how it will surely “<strong>go to the moon</strong>”!</p>\n<p>Inspired by all these comments and not wanting to miss out on a potentially great investment opportunity, you decided to go all-in, and invest your savings into the token. While you went to bed seeing your investment increasing tenfold, the next morning, you wake up to see that your new tokens are now worth but a few cents. This is often what a classic rug pull looks like.</p>\n<p>In this section, we are talking about rug pulls. I’ll explain the concept of what a rug pull is, in crypto, and give you a few examples of what classic rug pulls look like! In the end, I’ll also tell you what to look out for, when you suspect that a project might be a future rug pull.</p>\n<p>Let’s get to it!</p>\n<h2>What is a Rug Pull?</h2>\n<p>So, what is a rug pull in the world of crypto, exactly?</p>\n<p>Well, to put it in one word, it’s theft - <strong>literal theft</strong>. However, the definition of the term is also rather simple - it’s when the developers or project owners run away with people’s investments. A typical example of a rug pull would be that which I’ve mentioned in the introductory part of this section.</p>\n<p>Say, you’ve bought $100 worth of a token called “DefinitelyNotARugPull”. It’s a brand new project, but you’ve noticed that it has a lot of hype surrounding it, already - Reddit comments, Tweets, likes and upvotes, and so on. They even have a flashy and functional website!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a Rug Pull in crypto: An example of a Rug Pull.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-1.o.jpg/" alt=\"What is a Rug Pull in crypto: An example of a rug pull.\" width=\"1000\" height=\"289\" /></p>\n<p>All of these things can be used to lure unsuspecting investors into a trap. Once you bite the bullet and actually buy $100 worth of this new token, its price may rise for the first few hours or days, sure. This is just the period when the developers are generating hype, and trying to get as many people to buy in as possible.</p>\n<p>After those initial few days, however, your funds could be gone in <strong>a matter of minutes</strong> - in other words, you might get rug pulled. There are actually a few ways of how this would look like, so let’s explore the most popular methods of rug pulling, shall we?</p>\n<h2>Developers Selling their Tokens</h2>\n<p>Undoubtedly the most common method of how rug pulls are executed is by developers or companies behind the project <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-dumping/">dumping their own tokens into the market, thus crashing the price of the token. Allow me to elaborate on this.</p>\n<p>When developers create a project, they also set things such as total token supply, and initial token allocation. Meaning, they can give themselves any number of tokens that they’d like - in many cases, developers do that. Think of it as shares in a company.</p>\n<p>At first, the project is worthless, since it has just started - thus, the tokens are worthless, as well. However, as hype starts building up, and the project gets more and more recognition, the price of the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token <strong>increases</strong>, as well.</p>\n<p><img title=\"What is a rug pull in crypto: Developers selling their tokens.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-2.o.jpg/" alt=\"What is a rug pull in crypto: Developers selling their tokens.\" width=\"1000\" height=\"495\" /></p>\n<p>At some point, the project owners might decide to do a rug pull - simply dump their tokens into the market, causing an immediate and huge price crash. Suddenly, there are thousands or even hundreds of thousands more tokens on the supply side of things, and no demand - naturally, the token loses price!</p>\n<p>It’s worth mentioning that some rug pulls of this kind happen gradually, instead of a sudden dump - developers could choose to offload their tokens slowly, with the hopes that no one will notice. However, in the vast majority of cases, the rug pull will happen in a matter of minutes.</p>\n<p>In this situation, the developers will run away with a newly-acquired stack of <strong>ETH</strong> <strong>or BNB</strong> coins that they’ve traded their project token for, while investors will be left “holding the bag” of now-worthless tokens. As I’ve said - a classic example of a rug pull.</p>\n<p>If you want a real-world example of what this type of a rug pull looks like, you needn’t look further than into the alleged rug pull of the Squid Game token. This event even made the headlines of mainstream news sources! Essentially, the scenario of how it went down is very simple - some people created a token based on the popular TV show, and when investors started flocking in, the team behind the project allegedly rug pulled it, and ran away with the funds.</p>\n<p><img title=\"What is a rug pull in crypto: Squid Game example.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pulls-3.o.jpg/" alt=\"What is a rug pull in crypto: Squid Game example.\" width=\"1000\" height=\"582\" /></p>\n<p>While no law enforcement agency has “confirmed” this to be a rug pull, most of the crypto community agrees that the Squid Game token was, indeed, rug pulled.</p>\n<h2>Draining Liquidity</h2>\n<p>The second super-popular method of how rug pulls are performed is by draining the liquidity from the project. This might require some explanation.</p>\n<p>Imagine that you’ve come up with an awesome idea for a brand new <strong>cryptocurrency project</strong>. You’ve set everything up, and are ready to launch your project. However, since the token of your project is completely new, and thus, worthless, you will need to supply the project with liquidity, in order to allow other people to trade your tokens at the very beginning.</p>\n<p>So, what this would look like is something like this - you supply the market with your new tokens, in addition to some valuable crypto coins, such as <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum. This is called a liquidity pool - imagine it as a jar where you put two different types of candy into it. If you want to get a better understanding of liquidity pools, though, I urge you to go and read the section dedicated to <a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">liquidity pools</strong></a>, and then come back to this one.</p>\n<p>So, the pool allows new investors to come in, and trade their valuable tokens for your newly-created project tokens. With time, as more and more investors join in on the project, the pool will start receiving a lot more of the valuable crypto tokens, while having less and less of your project token.</p>\n<p style=\"text-align: center;\"><img title=\"What is a rug pull in crypto: Draining liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-4.o.jpg/" alt=\"What is a rug pull in crypto: Draining liquidity.\" width=\"1000\" height=\"702\" /></p>\n<p>What a malicious developer could do here is simply take out all of the liquidity from the pool - in other words, just how they initially put in their valuable coins or tokens into the project (for example, Ethereum), they could now take them out, in the same way. Now, however, they would be taking out much more than they’ve put in, thanks to all of the <strong>new investors</strong> that have contributed their ETH to the pool.</p>\n<p>In this situation, investors are, once again, left “holding the bag” - they can’t sell their worthless tokens, since all of the liquidity (or, Ethereum) has been drained out of the pool, by the malicious developers or project owners.</p>\n<h2>Malicious Code</h2>\n<p>Now, the third type of rug pulls has to do with malicious project code. Admittedly, it’s one of the rarer types of rug pulls - this doesn’t mean it doesn’t still happen, though! Since it’s a bit rare, it might even be overlooked. That is because not that many people know that this is even possible.</p>\n<p>Developers of a project could code some malicious mechanics into their <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contracts</strong></a>. For example, they could write code that prevents investors from selling their tokens - meaning, you could only BUY the token, but couldn’t SELL it.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a rug pull in crypto: Malicious code.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-5.o.jpg/" alt=\"What is a rug pull in crypto: Malicious code.\" width=\"1000\" height=\"1009\" /></p>\n<p>This would, obviously, make the price of the token go up, <strong>pretty fast</strong>, since no one but the developer is able to sell it. If they time it right, the people behind the project could dump their share of the tokens into the market before the word goes out, and the rug pull becomes evident.</p>\n<p>Unless you know where to look at, rug pulls like these can be easy to overlook! This is why it’s important to really dig deep into the project, read all of the investor feedback, and check for any potential loopholes.</p>\n<h2>How to Spot a Potential Rug Pull?</h2>\n<p>So, speaking of loopholes, now that you know what rug pulls are, and how the traditional rug pulls are executed, we can also take a look at some signs that you could spot within a project, if you suspect it to be a future rug pull in development!</p>\n<p>The very first and most-obvious thing to look out for is <strong>token distribution</strong> - in other words, if there are any number of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallets that hold a huge number of all of the available project tokens.</p>\n<p>How can you check this? Well, there are special websites, such as Etherscan and BscScan - these are blockchain explorers that allow you to enter the smart contract address for any Ethereum or Binance Smart Chain project out there, and check the token allocation. If you see that 10 or 20 wallets hold more than 50% of all the available tokens, chances are that there’s something fishy going on, and you should stay away from the project.</p>\n<p>The second thing to look out for has to do with liquidity. Remember when I told you about the liquidity draining method of a rug pull? Well, one way how you can see whether a project has the potential to be rug pulled this way is by checking if the liquidity for that project is locked or not.</p>\n<p><strong>Locked liquidity</strong> means that there’s no chance for the developers to access it, and thus, suddenly rug pull the project. Of course, you should also check for how long that liquidity is locked - if it’s just a couple of months, well, that’s not going to change much.</p>\n<p>The third sign that a project could be a potential rug pull is actually made up of two parts - anonymous developers, and a lack of an independent audit.</p>\n<p>If the developers for a project are anonymous, that should raise some red flags - if they DO end up rug pulling their project, you won’t really have any leads on who to seek out for your damages. If, however, the developers or project owners are well-known, and their identities are public, there’s a much smaller chance that a rug pull will happen.</p>\n<p>On that same note, if a project is <strong>independently audited</strong>, this also adds to its legitimacy claims. An independent audit is when the smart contract is checked by professionals who are actively trying to find potential loopholes and malicious projects. If there’s a lack of an audit, though, or if it has been audited by some shady, non-reliable auditor, then this should also raise some red flags.</p>\n<p>Last but not least, a huge thing that you should be aware of is how the developers - or the team behind the project, in general, - interact with their investors. Do they have an official website, a Discord, and a Twitter account? How is their communication - do they talk with their investors? Does it look like they’re trying to hide something, or are there questions that keep getting dodged all the time?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a rug pull in crypto: How to spot a potential rug pull?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-6.o.jpg/" alt=\"What is a rug pull in crypto: How to spot a potential rug pull?\" width=\"1000\" height=\"888\" /></p>\n<p>In general, you should really “get a feel” for the community and team behind a project, before you decide if it’s worth investing in or not. If there’s something not quite right, or you feel that there’s shadiness surrounding the project, it could be a rug pull, just waiting to happen.</p>\n<p>A great example of how intricate and difficult-to-spot rug pulls can be is a token called SaveTheKids. It was created and launched by a few different YouTube and social media <strong>influencers</strong>, most of who dumped their tokens into the market a few hours after the launch, thus crashing the token’s price.</p>\n<p><img title=\"What is a rug pull in crypto: Save the kids token.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-7.o.jpg/" alt=\"What is a rug pull in crypto: Save the kids token.\" width=\"1000\" height=\"790\" /></p>\n<p>Again, this was an ALLEGED rug pull - for legalities’ sake, this is just the conclusion that the community behind the project has come to, and no financial authority has really confirmed it. Nevertheless, it just goes to show that even if the project has an awesome community and some very well-known names behind it, you can still never be 100% certain that there isn’t something fishy going on, in the background.</p>\n<p>With that, though, we've come to an end of this section. I hope that now you will be more aware of <strong>the signs</strong>, that a rug pull might take place.</p>","meta_title":"What is a Rug Pull in Crypto: How it Works & How to Spot It","meta_description":"Read about what is a rug pull in crypto, how it works, and how to spot it! Several easy-to-understand examples of rug pulls are included!","meta_keywords":"what is a rug pull in crypto, rug pull definition, what is a rug pull nft, crypto rug pull examples, how does a rug pull work, how to spot a rug pull","order":9,"language":"en","created_at":"2022-05-04T05:54:42.000000Z","updated_at":"2023-04-24T13:41:44.000000Z","modified_content":"<p>In this section, we’re going to cover what is <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-rug-pull/">a rug pull</strong></a>, in crypto!</p>\n<p>Imagine that, one day, while browsing Reddit, you’ve stumbled upon a brand new crypto project - somebody made a post about a token that was just launched a few hours ago. It looks great, and there are multiple people commenting on how it will surely “<strong>go to the moon</strong>”!</p>\n<p>Inspired by all these comments and not wanting to miss out on a potentially great investment opportunity, you decided to go all-in, and invest your savings into the token. While you went to bed seeing your investment increasing tenfold, the next morning, you wake up to see that your new tokens are now worth but a few cents. This is often what a classic rug pull looks like.</p>\n<p>In this section, we are talking about rug pulls. I’ll explain the concept of what a rug pull is, in crypto, and give you a few examples of what classic rug pulls look like! In the end, I’ll also tell you what to look out for, when you suspect that a project might be a future rug pull.</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=\"What is a Rug Pull in Crypto? (Meaning + Examples)\"\n title=\"What is a Rug Pull in Crypto? (Meaning + Examples)\" 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: What is a Rug Pull in Crypto?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What is a Rug Pull in Crypto?\" 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=\"pgTVuCsUcKw\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What is a Rug Pull in Crypto? (Meaning + Examples)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/pgTVuCsUcKw/hq720.jpg/"/n alt=\"What is a Rug Pull in Crypto? (Meaning + Examples)\"\n title=\"What is a Rug Pull in Crypto? (Meaning + Examples)\"\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=\"What is a Rug Pull in Crypto? (Meaning + Examples)\">\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=\"pgTVuCsUcKw\">\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>So, what is a rug pull in the world of crypto, exactly?</p>\n<p>Well, to put it in one word, it’s theft - <strong>literal theft</strong>. However, the definition of the term is also rather simple - it’s when the developers or project owners run away with people’s investments. A typical example of a rug pull would be that which I’ve mentioned in the introductory part of this section.</p>\n<p>Say, you’ve bought $100 worth of a token called “DefinitelyNotARugPull”. It’s a brand new project, but you’ve noticed that it has a lot of hype surrounding it, already - Reddit comments, Tweets, likes and upvotes, and so on. They even have a flashy and functional website!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a Rug Pull in crypto: An example of a Rug Pull.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-1.o.jpg/" alt=\"What is a Rug Pull in crypto: An example of a rug pull.\" width=\"1000\" height=\"289\" /></p>\n<p>All of these things can be used to lure unsuspecting investors into a trap. Once you bite the bullet and actually buy $100 worth of this new token, its price may rise for the first few hours or days, sure. This is just the period when the developers are generating hype, and trying to get as many people to buy in as possible.</p>\n<p>After those initial few days, however, your funds could be gone in <strong>a matter of minutes</strong> - in other words, you might get rug pulled. There are actually a few ways of how this would look like, so let’s explore the most popular methods of rug pulling, shall we?</p>\n<h2>Developers Selling their Tokens</h2>\n<p>Undoubtedly the most common method of how rug pulls are executed is by developers or companies behind the project <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-dumping/">dumping their own tokens into the market, thus crashing the price of the token. Allow me to elaborate on this.</p>\n<p>When developers create a project, they also set things such as total token supply, and initial token allocation. Meaning, they can give themselves any number of tokens that they’d like - in many cases, developers do that. Think of it as shares in a company.</p>\n<p>At first, the project is worthless, since it has just started - thus, the tokens are worthless, as well. However, as hype starts building up, and the project gets more and more recognition, the price of the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token <strong>increases</strong>, as well.</p>\n<p><img title=\"What is a rug pull in crypto: Developers selling their tokens.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-2.o.jpg/" alt=\"What is a rug pull in crypto: Developers selling their tokens.\" width=\"1000\" height=\"495\" /></p>\n<p>At some point, the project owners might decide to do a rug pull - simply dump their tokens into the market, causing an immediate and huge price crash. Suddenly, there are thousands or even hundreds of thousands more tokens on the supply side of things, and no demand - naturally, the token loses price!</p>\n<p>It’s worth mentioning that some rug pulls of this kind happen gradually, instead of a sudden dump - developers could choose to offload their tokens slowly, with the hopes that no one will notice. However, in the vast majority of cases, the rug pull will happen in a matter of minutes.</p>\n<p>In this situation, the developers will run away with a newly-acquired stack of <strong>ETH</strong> <strong>or BNB</strong> coins that they’ve traded their project token for, while investors will be left “holding the bag” of now-worthless tokens. As I’ve said - a classic example of a rug pull.</p>\n<p>If you want a real-world example of what this type of a rug pull looks like, you needn’t look further than into the alleged rug pull of the Squid Game token. This event even made the headlines of mainstream news sources! Essentially, the scenario of how it went down is very simple - some people created a token based on the popular TV show, and when investors started flocking in, the team behind the project allegedly rug pulled it, and ran away with the funds.</p>\n<p><img title=\"What is a rug pull in crypto: Squid Game example.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pulls-3.o.jpg/" alt=\"What is a rug pull in crypto: Squid Game example.\" width=\"1000\" height=\"582\" /></p>\n<p>While no law enforcement agency has “confirmed” this to be a rug pull, most of the crypto community agrees that the Squid Game token was, indeed, rug pulled.</p>\n<h2>Draining Liquidity</h2>\n<p>The second super-popular method of how rug pulls are performed is by draining the liquidity from the project. This might require some explanation.</p>\n<p>Imagine that you’ve come up with an awesome idea for a brand new <strong>cryptocurrency project</strong>. You’ve set everything up, and are ready to launch your project. However, since the token of your project is completely new, and thus, worthless, you will need to supply the project with liquidity, in order to allow other people to trade your tokens at the very beginning.</p>\n<p>So, what this would look like is something like this - you supply the market with your new tokens, in addition to some valuable crypto coins, such as <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum. This is called a liquidity pool - imagine it as a jar where you put two different types of candy into it. If you want to get a better understanding of liquidity pools, though, I urge you to go and read the section dedicated to <a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">liquidity pools</strong></a>, and then come back to this one.</p>\n<p>So, the pool allows new investors to come in, and trade their valuable tokens for your newly-created project tokens. With time, as more and more investors join in on the project, the pool will start receiving a lot more of the valuable crypto tokens, while having less and less of your project token.</p>\n<p style=\"text-align: center;\"><img title=\"What is a rug pull in crypto: Draining liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-4.o.jpg/" alt=\"What is a rug pull in crypto: Draining liquidity.\" width=\"1000\" height=\"702\" /></p>\n<p>What a malicious developer could do here is simply take out all of the liquidity from the pool - in other words, just how they initially put in their valuable coins or tokens into the project (for example, Ethereum), they could now take them out, in the same way. Now, however, they would be taking out much more than they’ve put in, thanks to all of the <strong>new investors</strong> that have contributed their ETH to the pool.</p>\n<p>In this situation, investors are, once again, left “holding the bag” - they can’t sell their worthless tokens, since all of the liquidity (or, Ethereum) has been drained out of the pool, by the malicious developers or project owners.</p>\n<h2>Malicious Code</h2>\n<p>Now, the third type of rug pulls has to do with malicious project code. Admittedly, it’s one of the rarer types of rug pulls - this doesn’t mean it doesn’t still happen, though! Since it’s a bit rare, it might even be overlooked. That is because not that many people know that this is even possible.</p>\n<p>Developers of a project could code some malicious mechanics into their <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contracts</strong></a>. For example, they could write code that prevents investors from selling their tokens - meaning, you could only BUY the token, but couldn’t SELL it.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a rug pull in crypto: Malicious code.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-5.o.jpg/" alt=\"What is a rug pull in crypto: Malicious code.\" width=\"1000\" height=\"1009\" /></p>\n<p>This would, obviously, make the price of the token go up, <strong>pretty fast</strong>, since no one but the developer is able to sell it. If they time it right, the people behind the project could dump their share of the tokens into the market before the word goes out, and the rug pull becomes evident.</p>\n<p>Unless you know where to look at, rug pulls like these can be easy to overlook! This is why it’s important to really dig deep into the project, read all of the investor feedback, and check for any potential loopholes.</p>\n<h2>How to Spot a Potential Rug Pull?</h2>\n<p>So, speaking of loopholes, now that you know what rug pulls are, and how the traditional rug pulls are executed, we can also take a look at some signs that you could spot within a project, if you suspect it to be a future rug pull in development!</p>\n<p>The very first and most-obvious thing to look out for is <strong>token distribution</strong> - in other words, if there are any number of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallets that hold a huge number of all of the available project tokens.</p>\n<p>How can you check this? Well, there are special websites, such as Etherscan and BscScan - these are blockchain explorers that allow you to enter the smart contract address for any Ethereum or Binance Smart Chain project out there, and check the token allocation. If you see that 10 or 20 wallets hold more than 50% of all the available tokens, chances are that there’s something fishy going on, and you should stay away from the project.</p>\n<p>The second thing to look out for has to do with liquidity. Remember when I told you about the liquidity draining method of a rug pull? Well, one way how you can see whether a project has the potential to be rug pulled this way is by checking if the liquidity for that project is locked or not.</p>\n<p><strong>Locked liquidity</strong> means that there’s no chance for the developers to access it, and thus, suddenly rug pull the project. Of course, you should also check for how long that liquidity is locked - if it’s just a couple of months, well, that’s not going to change much.</p>\n<p>The third sign that a project could be a potential rug pull is actually made up of two parts - anonymous developers, and a lack of an independent audit.</p>\n<p>If the developers for a project are anonymous, that should raise some red flags - if they DO end up rug pulling their project, you won’t really have any leads on who to seek out for your damages. If, however, the developers or project owners are well-known, and their identities are public, there’s a much smaller chance that a rug pull will happen.</p>\n<p>On that same note, if a project is <strong>independently audited</strong>, this also adds to its legitimacy claims. An independent audit is when the smart contract is checked by professionals who are actively trying to find potential loopholes and malicious projects. If there’s a lack of an audit, though, or if it has been audited by some shady, non-reliable auditor, then this should also raise some red flags.</p>\n<p>Last but not least, a huge thing that you should be aware of is how the developers - or the team behind the project, in general, - interact with their investors. Do they have an official website, a Discord, and a Twitter account? How is their communication - do they talk with their investors? Does it look like they’re trying to hide something, or are there questions that keep getting dodged all the time?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a rug pull in crypto: How to spot a potential rug pull?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-6.o.jpg/" alt=\"What is a rug pull in crypto: How to spot a potential rug pull?\" width=\"1000\" height=\"888\" /></p>\n<p>In general, you should really “get a feel” for the community and team behind a project, before you decide if it’s worth investing in or not. If there’s something not quite right, or you feel that there’s shadiness surrounding the project, it could be a rug pull, just waiting to happen.</p>\n<p>A great example of how intricate and difficult-to-spot rug pulls can be is a token called SaveTheKids. It was created and launched by a few different YouTube and social media <strong>influencers</strong>, most of who dumped their tokens into the market a few hours after the launch, thus crashing the token’s price.</p>\n<p><img title=\"What is a rug pull in crypto: Save the kids token.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-a-rug-pull-7.o.jpg/" alt=\"What is a rug pull in crypto: Save the kids token.\" width=\"1000\" height=\"790\" /></p>\n<p>Again, this was an ALLEGED rug pull - for legalities’ sake, this is just the conclusion that the community behind the project has come to, and no financial authority has really confirmed it. Nevertheless, it just goes to show that even if the project has an awesome community and some very well-known names behind it, you can still never be 100% certain that there isn’t something fishy going on, in the background.</p>\n<p>With that, though, we've come to an end of this section. I hope that now you will be more aware of <strong>the signs</strong>, that a rug pull might take place.</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-a-rug-pull-in-crypto","youtube_video":{"id":18,"channel_id":1,"sort":44,"video_title":"What is a Rug Pull in Crypto? (Meaning + Examples)","description":"What is a rug pull in crypto?\n\nCrypto rug pulls are a type of scam that project developers can perform on their investors. Specifically, a rug pull happens when the developers or owners of a project run away with their investors' funds, and leave those same investors “holding the bag” of now-worthless project tokens.\n\nThere are multiple ways of how a rug pull can be performed. In this video, I will tell you about the most popular types of rug pulls, and also, how to spot a potential rug pull, in order to avoid falling for scams.\n\nAre you a victim of a rug pull in crypto? Maybe you’ve narrowly avoided getting rugged? Share your experiences in the comments below!\n\nVideo Time Table:\n\n0:00 Introduction to What is a Rug Pull in Crypto\n1:01 What is a Crypto Rug Pull?\n2:01 Rug Pull Examples: Developers Dumping Their Tokens\n3:50 Rug Pull Examples: Draining Liquidity\n5:20 Rug Pull Examples: Malicious Code\n6:23 How to Spot a Rug Pull?\n9:14 Wrap-up: What is a Rug Pull in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#WhatisaRugPullinCrypto #RugPullDefinition #WhatisaRugPullNFT #CryptoRugPullExamples #HowDoesaRugPullWork #HowtoSpotaRugPull","video_id":"pgTVuCsUcKw","duration":568,"view_count":845,"thumbnail_url":"https://i.ytimg.com/vi/pgTVuCsUcKw/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-03-25 14:50:08","created_at":"2022-03-25T23:00:01.000000Z","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":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.
/n
I 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!
/n
Token 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.
/n
I 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!
/n
Token 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"}},"featured_image":{"id":6555,"uuid":"80cbed9d-3b4b-45d9-9a85-d2d8108c0f32","public_url":"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pulls.o.jpg","path":"crypto/storage/media/how-to-avoid-rug-pulls.o.jpg","original_path":"crypto/storage/media/how-to-avoid-rug-pulls.jpg","name":"how-to-avoid-rug-pulls.o.jpg","original_name":"how-to-avoid-rug-pulls.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"111.99KB"}},"chapterList":[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/learn-blockchain.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/blockchain-101.jpg","rating":100,"sections":[{"slug":"what-is-blockchain","title":"What is the Blockchain?","featured_image_id":6412,"status":"published","chapter_id":1,"language":"en","order":1,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/what-is-blockchain","featured_image":{"id":6412,"uuid":"152ba579-ce8d-488a-9e06-bcd99e976b7d","public_url":"https://assets.bitdegree.org/crypto/storage/media/what-is-blockchain-626fbe085a0cd.o.jpg","path":"crypto/storage/media/what-is-blockchain-626fbe085a0cd.o.jpg","original_path":"crypto/storage/media/what-is-blockchain-626fbe085a0cd.jpg","name":"what-is-blockchain-626fbe085a0cd.o.jpg","original_name":"what-is-blockchain.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"93.86KB"},"youtube_video":null},{"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","featured_image_id":7205,"status":"published","chapter_id":1,"language":"en","order":2,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/decentralized-blockchain","featured_image":{"id":7205,"uuid":"c5d6f6a7-4914-4d6b-9fdd-e94dfb0bae82","public_url":"https://assets.bitdegree.org/crypto/storage/media/decentralized-blockchain-featured-image.o.jpg","path":"crypto/storage/media/decentralized-blockchain-featured-image.o.jpg","original_path":"crypto/storage/media/decentralized-blockchain-featured-image.jpg","name":"decentralized-blockchain-featured-image.o.jpg","original_name":"decentralized-blockchain-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"136.00KB"},"youtube_video":null},{"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","featured_image_id":7397,"status":"published","chapter_id":1,"language":"en","order":3,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/blockchain-transaction","featured_image":{"id":7397,"uuid":"e60dff45-4c5d-4b44-a2c1-a27e49f700e7","public_url":"https://assets.bitdegree.org/crypto/storage/media/blockchain-transaction-featured-mage.o.jpg","path":"crypto/storage/media/blockchain-transaction-featured-mage.o.jpg","original_path":"crypto/storage/media/blockchain-transaction-featured-mage.jpg","name":"blockchain-transaction-featured-mage.o.jpg","original_name":"blockchain-transaction-featured-mage.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"85.83KB"},"youtube_video":null},{"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","featured_image_id":7442,"status":"published","chapter_id":1,"language":"en","order":4,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/crypto-fees","featured_image":{"id":7442,"uuid":"f554012e-7fe1-4636-9718-81abd3499361","public_url":"https://assets.bitdegree.org/crypto/storage/media/crypto-fees-featured-image.o.jpg","path":"crypto/storage/media/crypto-fees-featured-image.o.jpg","original_path":"crypto/storage/media/crypto-fees-featured-image.jpg","name":"crypto-fees-featured-image.o.jpg","original_name":"crypto-fees-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"78.90KB"},"youtube_video":null},{"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in 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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-rug-pulls-in-crypto","readingTime":9,"readingLevel":"medium"},"url":"/crypto/learn/how-to-avoid-rug-pulls-in-crypto","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0">
All Crypto From

Scratch!

Crypto 101 Handbook

Chapter 1: Blockchain

1.1

What is the Blockchain?
1.2

Anonymous & Decentralized Blockchains: The Cornerstone of Crypto
1.3

What is a Blockchain Transaction in Crypto?
1.4

The Different Types of Crypto Fees Explained
1.5

The Key Notion Behind the Concept of Bridging in Crypto
1.6

Different Types of Blockchains: What to Look Out For?
Chapter 2: Cryptocurrencies

2.1

What is a Cryptocurrency?
2.2

How Does Cryptocurrency Work?
2.3

Is Cryptocurrency a Good Investment? The Pros & Cons
2.4

Coin VS Token: How Do They Differ?
2.5

What are Stablecoins, Altcoins & Wrapped Coins?
2.6

Bitcoin: the Pioneer of the Crypto World
2.7

The Ultimate Blockchain for dApp Creation: Ethereum
2.8

What is Cardano and What is It Used For?
2.9

Shiba Inu: the Dogecoin Killer
2.10

Is Solana an Improved Version of Ethereum?
2.11

The Bridge Between Blockchains: Polkadot
2.12

Polygon: the Essential Scaling Solution for Ethereum
2.13

The Practical Use of Crypto
Chapter 3: Crypto Exchanges

3.1

How do Cryptocurrency Exchanges Work?
3.2

DEX VS CEX: Two Sides of the Crypto Exchange Industry
3.3

Crypto Day Trading: The Difference Between Buying, Trading, and Swapping
3.4

KYC & AML: The Key to Complying With Legal Industry Standards
3.5

From Fiat to Crypto: How to Buy Crypto for the First Time
3.6

Taking Profits: Turning Crypto Into Fiat
3.7

You’ve Got Crypto: What Can You Do With It?
Chapter 4: Crypto Wallets

4.1

What is a Crypto Wallet?
4.2

Hot Wallet VS Cold Wallet: Which One to Pick?
4.3

What are Non-Custodial Crypto Wallets?
4.4

Metamask: The Leading Non-Custodial Wallet
4.5

The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?
Chapter 5: NFTs

5.1

What are Non-Fungible Tokens (NFTs)?
5.2

NFT Trading: The Ins and Outs
5.3

Tips and Tricks of Choosing the Right NFTs
5.4

How to Store NFTs: Best Practices
5.5

How to Create Your Own NFTs?
5.6

Making Passive Money with NFTs
Chapter 6: dApps & Defi

6.1

What is Decentralized Finance (DeFi)?
6.2

DeFi 2.0: The New Version of Decentralized Finance
6.3

What Are dApps and How Do They Work?
6.4

Picking the Right dApps: Dos and Don'ts
6.5

Web 3.0: The Future of the Internet
6.6

What is the Core Purpose of Smart Contracts?
6.7

The Notion of a Decentralized Autonomous Ogranization (DAO)
6.8

What is the Goal of Staking Crypto Assets?
6.9

What is a Liquidity Pool and How Does It Work?
6.10

Automated Market Maker: the Cornerstone of the Decentralized Crypto Exchange Industry
6.11

The Main Yield Farming Techniques
6.12

Crypto Oracles: The Link Between Blockchain and Outside World Data
6.13

The Peculiarities of Decentralized Crypto Gambling
6.14

Metaverse: A New Perception of Reality
Chapter 7: Trading & Investing

7.1

Where Can You Trade Cryptocurrencies?
7.2

Investing in Crypto: What Investing Options Do You Have?
7.3

ICO vs IDO vs IEO: Which One is the One?
7.4

What are Crypto Airdrops and How to Get Them?
7.5

How to Get Free Crypto Assets?
7.6

What is Crypto Arbitrage: The Main Principles
7.7

What is FUD: How to Use It to Your Advantage While Investing in Crypto?
7.8

Investing in Cryptocurrency: How to Manage Your Risks?
7.9

What is a Rug Pull in Crypto?
7.10

How to Spot and Avoid Rug Pulls?
7.11

The Key Legal Techniques of Avoiding Crypto Taxes
Chapter 8: Crypto Analysis

8.1

Bearish and Bullish Markets: Do They Matter?
8.2

5 Best Crypto Technical Analysis Indicators You Must Know About
8.3

Technical Analysis: What are Candlesticks, Trendlines, and Patterns?
8.4

Crypto Tracking: How to Track Your Favorite Coins & Tokens?
8.5

Crypto Research Fundamentals & Social Signals: Your Daily Trading Strategy
Chapter 9: Mining

coming soon

Chapter 10: Crypto Terms

10.1

All Crypto Terms

Handbook Cover Page

Chapter 7: Trading & Investing

How to Spot and Avoid Rug Pulls?

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?

Medium

9 minutes

Watch Video

In this section, I’m going to tell you how to avoid rug pulls in crypto!

Have you or your friends ever been “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?

As cryptocurrencies become more and more popular, there’s an ever-increasing 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!

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!

Let’s get to it!

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What is a Rug Pull?

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 rug pulls. 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.

To keep it short, a rug pull is a type of a crypto scam. 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!

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!

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.

How to Spot and Avoid a Potential Rug Pull?

Continuing on with the section, let’s take a look at 5 of the most common 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!

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 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.

General Outlook / Social Authority

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?

Most legitimate projects aren’t going to do sponsored videos from YouTubers, 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.

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.

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 high-profile people, who would otherwise have nothing to do with crypto, talking about a specific new coin or token.

I 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.

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!

This just goes to show that even online stars themselves can allegedly rug their fans. Thus, you should be very cautious!

Liquidity

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!

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 liquidity pool, the project owners could simply deposit $1000 into the pool, which would artificially increase the price of the token significantly!

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.

This actually leads us to the second part of this liquidity-related sign of how to spot a rug pull - locked liquidity.

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!

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!

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.

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 variables to consider, 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!

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 - here!

Token Allocation

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 wallets (also known as whales).

Thankfully, that’s super-simple to do! There are special services called blockchain explorers. The two most popular ones are Etherscan and BscScan - on them, you can enter the smart contract address of any project built on the Ethereum or Binance Smart Chain networks, respectively, and check a list of wallets holding the most project tokens.

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.

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.

Check the Project Whitepaper - Roadmap

Number four has to do with the Whitepaper of the project.

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 research on what it is that they do! Part of your research would surely include looking into the company’s mission statement, its roadmap, and so on.

Well, cryptocurrency projects are the same! If you want to avoid getting rugged, checking out the project’s Whitepaper or its roadmap is essential!

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!

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.

“I’ve Seen This Before”

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.

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 copy-paste the code from another project, and only change a few variables, such as the name of the token.

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.

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!

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.

Conclusion

There are various other ways how you can spot and avoid rug pulls, but I’ve told you about five of the most common and notable 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!

Prev Section

Handbook Cover Page

Next Section

All Crypto From

Scratch!

Crypto 101 Handbook

How to Spot and Avoid Rug Pulls?

Video Explainer: How to Spot and Avoid Rug Pulls?

What is a Rug Pull?

How to Spot and Avoid a Potential Rug Pull?

General Outlook / Social Authority

Liquidity

Token Allocation

Check the Project Whitepaper - Roadmap

“I’ve Seen This Before”

Conclusion

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Best Exchanges

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