Beware of The Crypto Rug Pull

Beware of The Crypto ICO and IDO “Rug Pull”

If you follow my Tweets you know I’m a big fan of Bitcoin. The reason is simple, Bitcoin is the “the peoples’ money”, or money made without or outside of the Federal Reserve Bank’s Control. While the Federal Reserve Bank destroys the dollar and the world economy, gold, silver and Bitcoin will be less affected by their corrupt and fraudulent behavior.

However, that does not mean all cryptocurrencies are good and every Bitcoin seller is good. There are a number of fraudulent Bitcoin sellers out there – some of whom are using my name and picture to trick buyers. And while there are a lot of good cryptocurrencies to invest in, there are some unethical practices you need to be aware of.

Many of you know what a “Pump-and-Dump” scheme is. It became popular from the movie “Boiler Room” in 2000. That move showed the pump-and-dump in action. For those of you who did not see the movie, the con is simple. A stock brokerage house buys a bunch of cheap shares in a worthless company. Then they start promoting that company as the “next big thing” and start convincing investors that they need to buy the shares now before the stock prices go sky high. This is the “Pump”.

As millions of gullible, financially uneducated investors jump in to get the “score of a life-time” the stock prices do go up significantly. At this point the broker sells all their shares, making them a huge profit. This is the “Dump”.

Of course, the sudden unloading of so many shares quickly drops the price of the shares as well as the realization that the company itself is worthless. All the buyers of the shares are left holding worthless stocks that they paid a fortune for. The brokerage feasted off all those financially uneducated investors.

A similar, unethical and illegal, strategy is being used in the crypto markets as well. Jeff Wang, my go-to crypto guy was recently teaching me to be aware of the new crypto ICO (Initial Coin Offerings) called IDO (Initial Decentralized Exchange Offerings) as it is popular with the “Rug Pull” scam. I’ve asked Jeff to explain this briefly so you do not get caught unaware AND understand the value of getting educated BEFORE you buy – even, no especially in the cryptocurrency world.

Jeff Wang: Crypto ICO, IEO and the IDO “Rug Pull”

Before I can explain the IDO “Rug Pull” a very brief history lesson of crypto-investing.

In 2017, the concept of creating new cryptocurrencies and selling them on exchanges had a very structured and organized release. These were called crypto Initial Coin Offerings (ICOs) where people created “units of service” as part of very complicated and technical projects.

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In reality, these were just loopholes to raise funds without giving up equity. Another problem was that equity wasn’t really a thing, there wasn’t really an “exit” per say, but more like increasing the value of the cryptocurrency by making their project more valuable.

Here was the recipe for a crypto ICO:

  1. Create a team, an idea, a website, a technical achievement to stand out, and a viable product that could gain adoption or at least be the platform for it. Many ideas were based on the technical limitations of Bitcoin and Ethereum.

  2. Raise funds, usually with Ethereum, to fund the project, the agreement would be to give back tokens from the project, in theory at a major discount than what would be listed on the public markets.

  3. Build out the project, sometimes even releasing Ethereum tokens before even the final project was complete.

  4. Over time, exchange agreements would be made to list the tokens, however, the project would give investors the tokens early, but this caused huge dumping on exchanges which sapped the prices.

  5. Over time again, these projects started limiting the supply of tokens given back to investors, this became more and more ridiculous, with many projects today which haven’t given investors back anything but have already traded on exchanges

Then the crypto Initial Exchange Offering happened

  1. Step 1 through 3 are the same, but the projects would sell through exchanges instead.

  2. Exchanges would limit the amount of available supply, usually around a few million dollars. When released, this would push up the price due to low liquidity.

  3. This gave projects a smaller raise, but more due diligence from the exchanges, this was a good method overall with a lot less price volatility.

  4. However, over time, fewer legitimate projects were found by these exchanges, and the IEO fizzled out slowly.

The new kid on the block Initial Decentralized Exchange Offerings (IDOs). There aren’t even any steps to this, a project is easily created on Ethereum, then immediately traded on Uniswap or other decentralized exchanges. In some cases, the project has no public developer, no website, and only a small chat room.

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This has become problematic, in the beginning, it was quite profitable (see July and August newsletters, where any coin coming out would be up 3-5x), but now there are so many new coins that it is tough to figure out how to value and follow these.

With almost zero data to determine what happens next, we’re entering uncharted territory. Over time, saturation is bad, and it really showed up at the end of 2018 where crypto ICOs were everywhere and everything sold off as a result.

Now that I’ve given a history lesson on crypto ICO, IEO, and IDOs, are there a few good things to look for? Yes, but this may not last long either so don’t relax your guard by stop learning and staying current. The following list is what I use when picking crypto IDOs to invest in for my RocketFuel Newsletter:

Checklist on picking an crypto Initial Decentralized Exchange Offerings:

  1. Legitimate team, a public team is always preferred to the anonymous developer projects.

  2. Limited supply, this gives the project higher upside.

  3. Supply distribution favors the public, if a few people have all of the coins (including the team), that is a recipe for a huge dip in prices in the future when the big holders (“whales”), sell everything. YFI is a good example where the coins were distributed without anything going to the team.

  4. On the same theme of supply, make sure not to buy something that is already at $10m+market cap, there is rarely any upside after that.

  5. Avoid the “rug pull”, meaning projects that have a possibility of collapsing due to increasing supply or high inflation. Many farmable projects had this issue because so much of the coin was being generated, and it was a ticking time bomb for that supply to be sold back into the market.

  6. Code has been audited, meaning it has been checked for bugs, controlled supply, and isn’t cheating the public.

Rug pulls are extremely risky, and have happened quite a few times. When people run into a project without thinking, it shoots up a coin price and then the coin can bankrupt that user’s wallet.

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It’s just like Robert says, “knowledge is money”. When you have money without knowledge it won’t be your money for long. But, if you make money through knowledge and keep learning, you’ll always be able to protect the money you have and make more.

Robert’s final thoughts on crypto ICOs and IDOs

Here is a quote from Rich Dad Poor Dad that I think sums up this whole lesson:

The Richest Businessmen

In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were:

  • Charles Schwab, head of the largest independent steel company;
  • Samuel Insull, president of the world’s largest utility;
  • Howard Hopson, head of the largest gas company;
  • Ivar Kreuger, president of International Match Co., one of the world’s largest companies at that time;
  • Leon Frazier, president of the Bank of International Settlements;
  • Richard Whitney, president of the New York Stock Exchange;
  • Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and
  • Albert Fall, a member of President Harding’s cabinet.

Twenty-five years later, nine of these titans ended their lives as follows: Schwab died penniless after living for five years on borrowed money. Insull died broke in a foreign land, and Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were released from prison, and Fraser and Livermore committed suicide.

I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was just before the 1929 market crash and the Great Depression, which I suspect had a great impact on these men and their lives.

The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be many booms and busts in the coming years that will parallel the ups and downs these men faced. I am concerned that too many people are too focused on money and not on their greatest wealth, their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer despite tough changes. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.

Most people fail to realize that in life, it’s not how much money you make. It’s how much money you keep. We’ve all heard stories of lottery winners who are poor, then suddenly rich, and then poor again.

If you are treating cryptocurrencies like the lottery then I wish you luck, but I expect failure. I’m not saying crypto is bad. Everything is bad, or dangerous, without getting financially educated first. That is simply the way it is.

Original publish date: October 05, 2020