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Rug pull in NFT Projects
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June 29, 2022

NFT Rug Pull: What Is It And How To Spot This Scam

Ordinarily, a rug pull is something that happens very suddenly and catches you by surprise. An NFT rug pull will still catch you by surprise, but instead of falling or tripping, you will be losing money. Is there a way to spot this potential scam from afar? How can you avoid this from happening to you? Read all about it below.

What Is A Rug Pull In NFT Projects?

Rug pull in NFT Projects

A rug pull is when NFT creators propose a project and purpose behind their NFTs, raise the necessary funds, do not follow through with what they promised, and disappear with all of the investors’ (those who purchased their NFTs) assets. It could also be a scammer driving up and pumping his or her own collection. After the price has been driven up, the scammer dumps all of the non-fungible tokens to tank the value.  

The Frosties project was an example of such a scam, and it’s also the first to see authorities bust and arrest those responsible. This creates more faith around NFTs because the scammers can be caught.

A rug pull is a scam, but it can be very hard to hold those responsible accountable for their actions unless they are doxxed. Don’t worry, though — you can limit your risk by identifying some telltale signs. 

Telltale Signs That An NFT Project Is A Rug Pull

A scam can happen overnight. You may go to sleep one day and wake up the next realizing you’ve been scammed. But how can you spot a scam from a mile away?

A big one that many NFT supporters look for is a development team that is doxxed. What does that mean? It means they are transparent with their identities. If they are, then it’s less likely the team will take off with your money. If they aren’t, then it’s hard to hold the individuals responsible. As a general rule, don’t go for anonymous NFTs. For example, the big Bored Ape Yacht Club developers are doxxed, which is good since their NFTs are super expensive.

Research the people behind the project, check out their social media links, and look at the backers, investors, and their business model, before investing.

Things To Do To Avoid Rug Pulls

We compiled a quick checklist to help you avoid an NFT rug pull. 

#1: Check If the Team Is Legit

Ensure that the developers, members, investors, and anyone involved are transparent with their identities. How else can you check if they are legit? Some NFTs are steep investments, so looking into the team’s background will keep you from being scammed.

An undoxxed team isn’t always illegitimate, as we can see from Boss Cat Rocket Club, but it’s just safer if you are aware of who the creators are. 

Check the project’s Twitter account, see who is talking about the members in Discord, and do whatever you need to do to feel safe when investing.

#2: Research the Online Community

Do research within the cryptocurrency and NFT community about the project if you want to avoid what happened to the Frosties investors. One of the red flags to look out for is if the developers and creators have zero history or record in the crypto community and NFT space on sites like NFT Drops.

If you find the circumstances to be a bit fishy after doing due diligence, as no other crypto investors or supporters of the NFT and crypto industry have heard of them or the project, then don’t do it.

Trust your research, but also verify with others in the crypto space.

#3: Mint or Transact on Official Platforms

Opensea

Only do transactions on official platforms. Do not take transactions off of an NFT market and send money directly to the creators. Make sure the projects mint NFTs (mint is the creation process) on reputable platforms and marketplaces such as OpenSea or Rarible. Going through a third party when purchasing NFTs in a collection will less likely lead to rug pulls.

#4: Carefully Examine Their Plans

An NFT project is very similar to a corporation; they have to have a roadmap and proposal (white paper) for potential investors to look at. The white paper should outline what the project is trying to do, the purpose behind the token, and what collectors will get by purchasing the tokens. 

The white paper should not read like an ad and should answers to questions crypto enthusiasts may have. Don’t invest your digital assets if it looks shoddy and hastily put together. 

#5: Check For Inconsistencies

Check their history and match their actions to their words. If a project claims to have done very well in the past with another collection, don’t just take their word for it — go check it out. Look beyond the past few months or a year, and research the project’s inception. 

Check for inconsistencies in their words vs actions. If the team does not have a good standing or has a reputation for being unreliable in the NFT ecosystem, then our advice is to stay away. 

#6: Do Not Share Any Personal Information

Do not share your personal information online with anyone, even if the collection is as big as the Bored Ape Club. It’s easy for hackers and those with ill intent to use your information for illegal proceedings. 

FAQ

Are rug pulls tax deductible?

No, rug pulls are generally not tax-deductible, but you should still record your losses. The best way to recuperate what you have lost is to sell the remaining tokens you have left. However, you shouldn’t be expected to pay capital gains on your losses.

How do I report a crypto rug pull on my taxes?

You would report a crypto rug pull on your taxes by recording it in the software technology you use. You can categorize the rug pull as a loss or something that was stolen. We would suggest recording the transaction details as well. 

Conclusion

Unfortunately, there is no surefire way to prevent rug pulls in the NFT world. You can take notice of red flags, but the best way is to research the token, the history of those behind the project, and if the price is reasonable to discern a scam from a legitimate project. We would also suggest going through a reputable platform when purchasing. 

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