Then, the developers suddenly sell off their holdings and disappear, leaving investors stunned and empty-handed.

The project’s sudden end causes its token’s price to decline sharply, and investors lose most of their money. 

                 How to identify rug pulls

In cryptocurrency’s exciting yet risky world, “rug pull” alarms even the most experienced investors. However, with your understanding of rug pull in blockchain, identifying red flags early is possible.

If you know the signs of a crypto rug pull, you’ll be able to identify potential scams before it’s too late.

From examining the project team to analyzing tokenomics and community engagement, here are the key steps to spot red flags and make smart investment decisions.

Being aware of rug pull alert signs helps you in preventing scams.

          Unknown or unidentified developers
Look into the reputation and integrity of the individuals behind new cryptocurrency ventures.

Find out if they’re well-known in the cryptocurrency world.

Evaluate their past performance and their ability to fulfill commitments to conclude how efficient they’ll be in dealing with crypto rug pull risks.

Watch out for fake social media identities and accounts. The quality of the project’s website, white paper and other media can also indicate its legitimacy.

                    Lack of liquidity lock
You can differentiate a reputable cryptocurrency from a scam coin by checking whether the currency’s liquidity is locked. Locked liquidity refers to a mechanism where a specified number of crypto tokens are held in a smart contract for a certain period.

If there is no liquidity lock, the project creators can remove all the liquidity whenever they want. Liquidity can be secured using time-locked smart contracts, ideally lasting three to five years after the token’s release.

                      Limit on sell orders
The code may prohibit some investors from selling, while others may be able to scam. You can test this by buying a small amount of the new coin and trying to sell it immediately. If you cannot sell tokens, it’s a red flag that the project is fraudulent.

Exploding price fluctuation with a limited number of tokenholders 

Be careful about abrupt price movements in new coins, particularly those without a liquidity lock. Fraudulent cryptocurrencies tend to see significant price surges before the decline. Use a block explorer to determine the total number of tokenholders. If a limited number of users hold a cryptocurrency, the token is more susceptible to price manipulation.

               Suspiciously high yield 

If it sounds too good to be true, it usually is. A new currency promising unusually high yields might be a Ponzi scheme if it isn’t a rug pull. Although not always a sign of fraud, tokens with triple-digit annual percentage yields (APYs) typically come with high risk.

                    No external audit 

Check whether the cryptocurrency you’re considering investing in has undergone a rigorous code audit by a trustworthy third party. Potential investors shouldn’t just believe a development team when it says an audit has been conducted. Rather, they should examine who the auditor is and how reliable they are.