What Is a Rug Pull in Cryptocurrency? How Scammers Drain Your Funds and How to Avoid Them

• by Eamon Ledgerwood
• Nov 2, 2025
• 8 Comments

What Is a Rug Pull in Cryptocurrency? How Scammers Drain Your Funds and How to Avoid Them

Imagine putting your money into a new cryptocurrency that’s trending on Twitter, promised 10x returns, and backed by a team with zero public names. Then, one day, the app crashes, the token price crashes harder, and you can’t sell anything. Your investment? Gone. That’s a rug pull.

It’s not a glitch. It’s not bad luck. It’s a planned theft - and it’s happening all the time. In 2022 alone, rug pulls stole over $2.8 billion from crypto investors. That’s more than the combined losses from FTX, Celsius, and Voyager. And the worst part? Most victims had no idea they were walking into a trap until it was too late.

How a Rug Pull Actually Works

A rug pull isn’t just a scam. It’s a carefully timed exit strategy. Developers create a new token - often on decentralized exchanges like Uniswap or PancakeSwap - and make it look real. They build a website, post fake team photos, hire influencers to shout about it on Telegram and TikTok, and even list it on small crypto trackers. Then they do something smarter: they lock liquidity. Or so they say.

Here’s the trick: liquidity is the money in the trading pool that lets you buy and sell the token. If it’s locked, you think your money is safe. But in 91% of rug pulls, that lock is either fake or expires within 72 hours. Once the token price spikes from hype, the developers drain the liquidity pool, sell their own massive holdings, and vanish. The token becomes worthless. The community is left with nothing.

There are two main types:

• Hard rug pulls - The code is rigged from day one. Smart contracts are built to prevent you from selling (called a honeypot), or let the devs mint unlimited new tokens to crash the price. The $SQUID token in 2021 was a textbook example - it had a hidden function that blocked sells but allowed the team to dump 99% of their holdings.
• Soft rug pulls - No code manipulation. Just pure deception. The team promotes the token, pumps it with fake volume and coordinated buying, then quietly dumps their coins when the price peaks. No hack. No exploit. Just a well-timed lie.

According to Coinbase’s 2023 data, 68% of rug pulls use malicious code. The rest? Pure psychology. They count on FOMO - fear of missing out - to make you act before you think.

Why Rug Pulls Are So Common in DeFi

DeFi - decentralized finance - was supposed to be open, transparent, and fair. But its biggest strength is also its biggest weakness: no one needs permission to launch a token. You don’t need a license. You don’t need a bank account. You just need a wallet and a few hours to code a token on a platform like Remix.

That’s why 73% of rug pulls happen on DeFi platforms. They’re fast, anonymous, and nearly impossible to stop before the damage is done. Unlike centralized exchanges like Binance or Coinbase, where teams are vetted and audits are required, DeFi lets anyone list anything. And scammers know it.

Most rug pulls target BNB Chain (formerly Binance Smart Chain), which accounted for nearly half of all incidents in 2022. Why? Lower fees. Faster transactions. Less scrutiny. Ethereum is next, but it’s getting harder to pull off there because of better tools and more public scrutiny.

Red Flags That Signal a Rug Pull

You don’t need to be a coder to spot a rug pull. You just need to know what to look for. Here are the top five warning signs:

1. Anonymous team - If the developers have no LinkedIn, no real names, no past projects, or only pseudonyms - walk away. Over 92% of rug pulls have anonymous teams.
2. Unlocked liquidity - Check Etherscan or BscScan. If the liquidity isn’t locked for at least 6 months, it’s a red flag. Projects with unlocked liquidity are 11.7 times more likely to rug pull.
3. No audit - Legit projects get audited by firms like CertiK, OpenZeppelin, or Hacken. If there’s no audit report, or it’s from an unknown company - don’t invest. 83% of rug pulls have no third-party audit.
4. Unrealistic returns - APYs over 10,000%? Daily returns of 50%? That’s not finance. That’s a lie. Real projects don’t promise the moon.
5. Too much dev allocation - If the team holds more than 15% of the total supply, they have too much power to crash the price. In 79% of rug pulls, devs hold over 20%.

One user on Reddit lost $5,000 on a token that promised 12,000% APY. The team had zero online presence. The audit? A PDF from a site that didn’t exist. The liquidity? Unlocked. He didn’t check any of it. He just saw the price go up.

How to Protect Yourself

There’s no 100% guarantee, but you can cut your risk dramatically. Here’s a simple 5-step checklist you can do in under an hour:

1. Check the team - Google every name. Look for LinkedIn profiles. Do they have a history in crypto? Or are they new to everything? If they’re anonymous, skip it.
2. Verify liquidity lock - Go to Etherscan (for Ethereum) or BscScan (for BNB Chain). Find the token’s contract. Look for the liquidity pool. Is it locked? For how long? Tools like DeFiYield or Unicrypt show lock status in real time.
3. Read the audit - If there’s an audit, download it. Don’t just look at the logo. Read the summary. Did they find any critical issues? If the audit says “no critical issues,” but the team has a 20% dev allocation - that’s still risky.
4. Look at the tokenomics - How much is allocated to the team? To marketing? To liquidity? If the team gets more than 15%, or if over 50% of tokens are unvested, it’s a red flag.
5. Watch the community - Is the Telegram group full of bots? Are people only posting “TO THE MOON!” with no real discussion? Are influencers being paid to shill? Use RugDoc.io or CoinHunters to scan for honeypots and fake volume.

One investor in Wellington saved $12,000 in March 2023 by using RugDoc.io. The tool flagged a token as a honeypot 12 hours before launch. He didn’t buy. Later, the team drained $1.8 million. He didn’t get rich. But he didn’t lose everything.

What Happens After a Rug Pull?

Once the devs vanish, the token is dead. The blockchain doesn’t lie - you can see every transaction. But recovering funds? Nearly impossible. There’s no central authority to call. No customer support. No refund policy.

Some cases get investigated. The U.S. SEC has filed 17 rug pull cases since 2022, including the $11 million Flokinomics scam. But these are rare. Most victims are retail investors - people with small amounts, scattered across the world. The cost to track them down? Higher than the money stolen.

That’s why prevention is everything. There’s no “undo” button in crypto. Once the rug is pulled, you’re on your own.

Is There Any Hope?

Yes - but it’s slow. Major exchanges are raising the bar. Binance’s Launchpad now requires a minimum 12-month liquidity lock for all listed tokens. Coinbase requires full audits. Tools like Unicrypt and RugZombie are making it easier to spot bad projects before you invest.

Even better: more projects are “doxxing” their teams - putting real names, photos, and LinkedIn profiles online. Coinbase’s data shows that doxxed projects have 89% fewer rug pulls. Why? Because if you’re real, you’re accountable.

And new standards are coming. Ethereum’s proposed ERC-7208 would force all new tokens to publicly disclose liquidity lock status. That could cut rug pulls by over 60%.

But here’s the truth: as long as crypto stays permissionless - as long as anyone can create a token with no oversight - rug pulls will exist. The goal isn’t to eliminate them. It’s to make them harder to pull off… and easier for you to avoid.

Final Advice: Don’t Chase Returns. Chase Transparency.

Crypto is full of noise. Everyone’s shouting about the next 100x. But the people who keep their money? They don’t chase hype. They chase proof. They check the team. They verify the lock. They read the audit. They walk away from the shiny thing with no answers.

If you’re new to crypto, start small. Learn how to read Etherscan. Understand what liquidity means. Use free tools like RugDoc.io. Don’t invest more than you can afford to lose - because in this space, losing everything is always a possibility.

The rug pull isn’t going away. But you don’t have to be the one on the floor when it happens.