The rug pull scam is one of the most notorious financial frauds, commonly associated with cryptocurrency, but its mechanics extend far beyond digital assets. This deceptive tactic has also been used in stock markets, crowdfunding, NFTs, and even traditional businesses. The key to its effectiveness lies in creating hype, attracting investors, and then abandoning the project while pocketing the funds.
This article breaks down how rug pulls work, their different types, real-world examples, and how investors can avoid falling victim.
What is a Rug Pull?
A rug pull occurs when developers or project leaders suddenly withdraw their support or funds, causing the value of the asset to collapse. The term originates from the idea of pulling the rug out from under unsuspecting investors.
Key Characteristics:
- Overhyped Promotion: Fraudsters generate buzz around a new token, stock, or project to attract investment.
- Initial Investor Buy-In: Early investors fuel the growth, believing in high returns.
- Abrupt Exit: The creators sell their holdings, disappear, or cease operations, draining liquidity and leaving investors with worthless assets.
Rug Pulls in the Cryptocurrency Market
In crypto, rug pulls typically occur in new tokens or decentralized finance (DeFi) projects. Developers create an illusion of legitimacy through aggressive marketing, fake partnerships, and promises of massive future gains.
Types of Crypto Rug Pulls:
- Liquidity Rug Pulls: Developers provide liquidity to a decentralized exchange (DEX), making the token tradable. Once investors buy in, they withdraw all liquidity, leaving the token unsellable.
- Minting Exploits: Malicious projects mint an unlimited supply of tokens, instantly devaluing investors’ holdings.
- Smart Contract Backdoors: Some developers leave hidden code in the smart contract that allows them to steal investor funds at will.
Example: Squid Game Token (2021)
The Squid Token capitalized on the Netflix show’s popularity, surging in value within days. However, investors soon discovered they couldn’t sell their tokens. Meanwhile, the developers drained millions in liquidity and disappeared, leaving the token’s price to collapse.
Example: Javier Milei and the LIBRA Scam (2025)
On February 14, 2025, Argentine President Javier Milei promoted the LIBRA cryptocurrency on his Twitter (X) account, claiming it was the future of money and a tool for financial sovereignty.
However, LIBRA turned out to be a classic rug pull scam. The project’s developers used Milei’s endorsement to attract thousands of investors, who poured their money into the token. Once the token gained value, the developers withdrew liquidity and vanished, causing the price to collapse and leaving investors with worthless assets.
This case highlights how even high-profile endorsements can play a role in crypto fraud, making it essential for investors to do their own research rather than blindly trusting influencers or political figures.
Rug Pulls in the Stock Market
Though “rug pull” is a term mostly used in crypto, the same fraudulent strategies occur in traditional finance.
Pump-and-Dump Schemes:
A pump-and-dump works similarly to a crypto rug pull. Fraudsters artificially inflate a stock’s price through hype, fake news, or insider manipulation. Once retail investors pile in, the original promoters sell off their shares, causing the stock price to plummet.
Example: Enron (2001)
Enron executives manipulated financial statements to make the company look more profitable than it was. Investors rushed in, unaware of the fraudulent accounting. When the truth was exposed, the stock price crashed from $90 to under $1, wiping out billions.
Reverse Merger Rug Pulls:
Some companies use reverse mergers to go public without scrutiny. They hype the stock, then insiders dump their shares, leaving investors with a worthless shell company.
Rug Pulls in Other Markets: Crowdfunding and NFTs
Crowdfunding Rug Pulls:
Platforms like Kickstarter and Indiegogo have seen projects raise millions, only for their creators to vanish without delivering.
Example: Coolest Cooler
This Kickstarter campaign raised $13 million for an innovative cooler but failed to deliver. Many backers lost their money as the company ran out of funds before fulfilling all orders.
NFT Rug Pulls:
The NFT boom brought new rug pull scams, where creators sell digital art, make promises about future value, and then disappear.
Example: Evolved Apes (2021)
The creators of the Evolved Apes NFT collection promised an interactive game. Instead, they disappeared with $2.7 million in investor funds, deleting all online presence.
How to Avoid Rug Pull Scams
- Research the Team: Verify developers’ identities. Anonymous teams increase the risk of fraud.
- Analyze the Smart Contract: In crypto, ensure contracts are audited and don’t contain suspicious code.
- Check for Locked Liquidity: If liquidity isn’t locked, the project can vanish overnight.
- Watch for Unrealistic Promises: Guarantees of “100x returns” or “risk-free” investments are red flags.
- Follow the Money Flow: If founders hold a majority of tokens or shares, be cautious—they can dump them at any moment.
Conclusion: Rug Pulls Are Everywhere
While crypto rug pulls grab headlines, this scam exists across financial markets. Whether it’s a crypto token, stock pump-and-dump, failed crowdfunding campaign, or NFT fraud, the pattern remains the same: hype, rapid investment, and sudden collapse.
The LIBRA case shows how even political figures can unknowingly contribute to financial fraud. Investors must remain skeptical and always conduct due diligence before trusting any investment opportunity—no matter who promotes it.
Understanding how rug pulls work is the first step in protecting your investments. In a world of financial innovation, due diligence is your best defense.