Loading...
What Is a Rug Pull and How to Spot One
In October 2021, a token called SQUID, riding the popularity of Netflix’s “Squid Game,” rose from under a cent to $2,861 in about a week. On November 1, its anonymous creators drained roughly $3.3 million from the project and vanished within minutes, deleting their website and social media accounts. The price fell to zero almost instantly. This is a rug pull, and the warning signs were there the entire time.
What Is a Rug Pull, Exactly?
A rug pull is a scam where a crypto project’s creators build hype, attract investment, and then abandon the project while taking investors’ funds with them, leaving everyone else holding a worthless token. The name comes from “pulling the rug out” from under someone, an accurate description of how suddenly it usually happens. It’s one of the most common forms of crypto fraud specifically because it’s cheap and easy to execute: creating a token costs very little, and a convincing website and whitepaper can be assembled in a weekend by anyone with basic technical skill. So if someone asks you what is a rug pull, the short answer is: an exit scam dressed up as a crypto project.
The Main Types of Rug Pulls
Liquidity drains. Developers withdraw all the funds backing a token’s trading pair on a decentralized exchange, instantly collapsing its price to near zero. This is the fastest and most common version, since the entire mechanism depends on a single action developers can trigger whenever they choose.
Honeypot contracts. The smart contract itself is coded to allow buying but block selling, trapping anyone who buys in. This was exactly the mechanism behind the SQUID token. Because the restriction is written into the code itself, the price can appear to climb steadily, since new buyers keep entering while nobody who already holds the token can exit, right up until developers cash out through a backdoor built into the same contract.
Soft rug pulls. Rather than an instant exit, developers gradually sell off their own large holdings over time, quietly draining value while the project superficially continues operating. This version is harder to spot in real time, since the project might still have an active team, a working product, and genuine community activity, even as its actual value quietly bleeds out.
How the Squid Game Token Rug Pull Actually Worked
SQUID launched with a whitepaper promising a “play-to-earn” game based on the show, despite having no actual affiliation with Netflix. The anonymous team built hype around a trending cultural reference rather than any real product. Critically, the token’s contract prevented holders from selling, something a small amount of research into the contract itself would have revealed before ever buying in. The whole episode, from launch to collapse, played out in under two weeks, a timeline that would have felt impossibly fast to anyone used to traditional markets, and that speed is itself part of the playbook: the shorter the window, the less time exists for scrutiny to catch up with hype. When the developers finally exited, they didn’t need to fight against sell pressure from panicked holders, because nobody had ever been able to sell in the first place.
| Red Flag | What It Signals |
|---|---|
| Anonymous team, no verifiable history | No accountability if something goes wrong |
| Hype tied to a trend, no real product | Value depends on attention, not utility |
| Can’t sell after buying | Likely a honeypot contract |
| Liquidity not locked | Developers can drain funds at will |
| No audit, or an unverifiable one | No independent check on the contract’s behavior |
How to Spot One Before You Buy
Beyond checking the red flags above, a genuinely useful test: try a small test sell shortly after buying, on a small amount, specifically to confirm the contract actually allows it. Check whether liquidity is locked, meaning developers can’t withdraw it on demand, through a publicly verifiable locking service. And research the team’s identity and track record before hype, not after a price has already started climbing, since by the time a token is trending, the decision window has usually already closed. None of these checks require advanced technical skill. Most can be done using free, publicly available tools built specifically for exactly this purpose, and the combined time investment is minutes, not hours.
Spotting a rug pull is defense. Knowing how to evaluate a legitimate project is offense.
The Crypto/DeFi Trading Course covers both sides of that evaluation as one connected skill.
Can You Get Your Money Back?
Realistically, rarely. Funds are typically moved through multiple wallets and mixing services designed specifically to obscure the trail, and anonymous developers are difficult to identify, let alone prosecute, across jurisdictions. What to Do If You’ve Been Scammed in Crypto covers the practical steps worth taking regardless, even when full recovery isn’t likely. Prevention through research before buying remains far more reliable than recovery after the fact.
Frequently Asked Questions
Are all new token launches rug pulls?
No. Many legitimate projects launch new tokens with genuine teams, real audits, and locked liquidity. The red flags covered here help distinguish those from the ones built specifically to disappear.
What does “locked liquidity” actually mean?
It means the funds backing a token’s trading pair are held in a smart contract that prevents withdrawal for a set period, verifiable publicly, which removes the developers’ ability to drain it on demand.
Can a rug pull happen on a centralized exchange?
It’s far less common, since centralized exchanges generally review projects before listing them. The overwhelming majority of rug pulls happen on decentralized exchanges, where listing a token requires no approval process at all.
Is it safe to buy a token immediately after it launches?
It’s meaningfully riskier than waiting, since a brand-new token has no track record to evaluate yet. Letting a project exist for even a short period before buying gives red flags, or the absence of them, more time to surface.
What’s the difference between a rug pull and a coin that just fails?
Intent. A rug pull is a deliberate scheme where developers plan to abandon the project and take funds from the start. A coin failing organically, through poor execution or lack of demand, is a different, non-fraudulent outcome, even though the financial result can look similar to holders.
Do rug pulls only happen with meme coins?
They’re most common in that category because launching one requires minimal effort or credibility, but the same mechanics can technically apply to any token, regardless of its stated purpose.
The SQUID token’s warning signs, an anonymous team, hype without substance, and a contract that quietly blocked selling, were all visible before anyone lost money, not just in hindsight. That’s true of most rug pulls. The pattern is recognizable in advance; it’s just rarely checked before the excitement takes over. The five minutes it takes to check are almost always cheaper than the alternative. Once you can answer “what is a rug pull?” with a real example, the warning signs become much easier to see in time.
Ready to evaluate projects with a real process instead of hype? The Crypto/DeFi Trading Course teaches exactly that.
Prefer to learn from a book, at your own pace? The Crypto Book Series covers this in more depth. If you’re new to crypto, start with Book 1, then work through the series as you go.
Found a token and something feels off? Join DavitoFinance Pro on Telegram, free, and get a second opinion before you buy, not after.
