"Rug Pull" refers to a fraudulent approach in which investors are suddenly and unexpectedly robbed of their investment basis. This form of fraud occurs in particular in connection with cryptocurrency investments.
Rug Pull - simply explained
In contrast to conventional investments, cryptocurrencies - with the exception of stablecoins, which are linked to or backed by state currencies - are mainly based on speculative considerations. The value of a cryptocurrency is determined by supply and demand, whereby the decisive factor is how many people would like to own it or what price they would pay for it.
Supply and demand also determine the price of commodities or conventional shares, but these assets are often based on material or economic fundamentals. When you buy a commodity or share, you usually acquire a share in an asset whose demand is also supported by actual use or company activities.
A complete loss of value is therefore usually less likely, as commodities such as oil or gold, for example, continue to be used and companies can generate sales even in difficult market phases.
Cryptocurrencies, on the other hand, often have no real demand or real use and their price is therefore calculated purely speculatively. If investors therefore believe that coin XY will be bought heavily in the future for whatever reason, the demand and therefore the price is merely the result of this speculation and is not supported by organic economic demand and economic interdependence. This circumstance allows for high volatility, which can lead to rapid price increases on the one hand, but also to rapid price declines on the other. The value of cryptocurrencies is therefore calculated almost exclusively from the mass psychology of investors. Cryptocurrencies that have already been established as a means of payment or have a real benefit are an exception.
The volatility of the price (profit potential/risk) applies all the more to cryptocurrencies with a small market capitalisation. This means that "larger" cryptocurrencies such as ETH, XRP, BTC and SOL are less likely to experience major price fluctuations than newer or smaller cryptocurrencies and tokens.
Since the market capitalisation (funds tied up in the respective cryptocurrency) must double or halve accordingly if the price doubles or halves, for example, the opportunities and risks of a price increase the smaller the current market capitalisation is.
For smaller cryptocurrencies, a few million euros in new capital is often enough to cause an extreme price increase, while established cryptocurrencies require several hundred billion in additional capital to achieve the same percentage increase in price.
This is what makes early investment in start-up or underdog coins so attractive for private investors. However, the risks are often underestimated.
So there are current Statisticswhich state that 99.95 per cent of all cryptocurrencies and tokens will become worthless and over 90 per cent are the planned project of a rug pull.
Rug pulls are often observed with meme coins based on the Solana blockchain, which are heavily advertised before trading begins. Potential buyers are often promised high staking returns and the coin is offered via a pre-sale homepage. In addition, the coin is often ascribed a specific benefit or a special property.
The coins are advertised intensively on various platforms, including those with a reputable reputation.
The same applies to tokens already listed on crypto exchanges. These generally still have a low market cap. The prices are kept stable with great effort and financial expenditure and in some cases a price rally is artificially initiated. As already mentioned, only a small amount of capital is required for this, which is usually raised by a group of networked players. Potential investors then see an attractive profit opportunity influenced by the aggressive advertising of the coins and the rising prices. The fraudsters, who have bought the token cheaply in a network and artificially raised the price, are now waiting for real investors, i.e. a new price rally, to suddenly sell the coins.
The insiders who planned the rug pull profit from the price jump and suddenly sell such an enormous quantity of coins that the price suddenly plummets and is only worth a fraction of its original value.
The real investors are left with worthless coins.
The word rug pull here means that the rug is literally pulled out from under investors' feet. This sudden sell-off leads to further hysteria and usually ends within a few minutes with the previously hyped cryptocurrency becoming worthless, leaving investors with a total loss.
This planned and organised approach is now widespread and causes billions in losses. Legal proof of this scam is difficult, but possible. Rug pulls are often organised and the players work together routinely.
This routine collaboration between the players makes it easier for us to Crypto forensic experts However, this makes it easier to track the money and for the law enforcement authorities to prove fraudulent intent.
In order to reduce the risk of rug pulls, it is advisable to obtain detailed information about the respective cryptocurrency or token. Investments in established tokens with high market capitalisation can be considered. Attention should be paid to whether information on well-known news or business platforms is labelled as paid advertisements from third parties. According to current estimates, only a few of the currently existing tokens are likely to remain in existence in the long term. A critical evaluation of various offers is recommended.
This blog article was written by our employee Jan Bonhard written.
If you have fallen victim to a so-called rug pull scam, our experienced team of investigators will be happy to assist you.
