The cryptocurrency sector is plagued by frauds that will steal investors’ money worth over $7.7 billion in 2021, despite the potential of blockchain technology to revolutionize global trade without the need for centralized financial institutions or other intermediaries like banks.
Despite the potential of blockchain technology to revolutionize global trade without the need for centralized financial institutions or other intermediaries like banks, the cryptocurrency industry is plagued by scams that stole investor money valued at over $7.7 billion in 2021.
Out of this, “rug pulls” or “pump and dump” scams lost more than $2.8 billion, making up the majority of the unlawful funds that innovators and bad actors have illegally stolen from the cryptocurrency market.
Rug pulls occur when a cryptocurrency token developer artificially inflates the price of a token, abandons the business, and then takes investor funds with them.
They are distinguished by a disproportionate increase in token price.
Pump and dump scams made up just 1% of all cryptocurrency frauds in value terms in 2020, but by 2021 they had climbed to almost 36%, signaling a serious problem for crypto investors throughout the world.
How does a pump-and-dump cryptocurrency strategy work?
Crypto tokens provide the medium of exchange for blockchain initiatives with particular use cases, such as decentralized finance (DeFi), gaming, media, and entertainment.
According to a predetermined supply mechanism, these tokens are generated in certain circumstances, such as when validators on the underlying blockchain engage in the consensus process.
Occasionally, security weaknesses in the code of token creators allow them to steal money from investors without their awareness.
This so-called “hard rug pulls” generally take place during the first token sale period or immediately afterward and include the business’s founders departing with the money raised for more project development.
Soft rug pulls, in contrast, occur when token creators sell off their excess supply on cryptocurrency exchanges, bringing the price of the token down.
Even though they are not legally illegal, soft rug pulls are often far easier to spot than hard rug pulls since they reveal the creators of the project had a hidden agenda.
Before most investors could even respond to the dramatic price decrease, the developers of the SnowDogDAO project shifted to a specialized market maker platform called SnowDog AMM and sold the native SDOG coin.
Investors should be skeptical of projects that make bold claims since a pump-and-dump scam is far more likely to happen when investors rush to buy the underlying token without taking the project’s fundamentals into account.
Pump and dump techniques may be divided into three categories: dumping, limiting sell orders, and outright liquidity robbery.
Investors are left with either no tokens or tokens that have been dramatically discounted in all pump-and-dump scams.
Dumping, a strategy where the token’s creators themselves sell every token they own during the height of investor demand, is more likely to happen with projects that have swiftly drawn a lot of investor interest.
These efforts can be recognized by investors by their excessive use of social media promotion or by any additional awards that can look excessively generous.
Similar to this, the most common way to covertly withdraw investor funds from DeFi projects that have a lot of value locked in liquidity pools, where investors stake their tokens in the hope of earning returns on their investments that outperform the market, is through a practice known as “liquidity snatching.”
Liquidity grabbing has a cascading impact on the token’s price that finally pushes it to zero when investors want to sell or withdraw their tokens since these funds are directly linked to the token’s worth.
Since investors are restricted in their ability to sell their holdings, which is often added as an anti-dumping provision, such tokens can rise to amazing sums in a short period of time.
The developers have the benefit of being able to sell tokens whenever they want as a result of the creation of a fictional demand-supply gap.
The debut of the Squid Game token in November of last year provided an excellent example of this type of rug pull, with the SQUID token skyrocketing to almost $3,000 within a few days of becoming live. Investors were unable to sell any of the purchased tokens due to an anti-dumping feature built into the token, nevertheless.
