Learn What An NFT Rug Pull Is And How To Avoid It!
What Is An NFT Rug Pull?
This is a common NFT scam.
An NFT rug pull is sometimes referred to as an exit scam. A scammer sets out from the start to steal investors’ money and vanish.
How does an NFT rug pull work?
First, a scammer creates or purchases a collection of NFT artwork.
Next, the scammer creates social media accounts and buys followers or bots to make their project look popular.
Once the NFT collection is ready, they advertise to the NFT community. They promise investors the world and try to create as much hype around their project as possible.
New investors jump in on the hype and purchase the NFTs. Once the scammer has made enough money, they often vanish without a trace.
Sometimes they disappear overnight, and some scammers (especially in a bullish market) will stay active to keep the secondary sales (they earn royalties on each NFT sold) going for a few weeks to milk investors.
Once the scam is exposed, the NFT collection collapses in price, leaving investors with worthless digital art.
Occasionally, the community will rally around and bring the collection back to life (de-rug) with new mints and airdrops for the NFT bag holders. There have been some successful de-rugs, but most fail.
Are NFT Rug Pulls illegal?
Yes!
The US department of justice and the IRS have made it clear that you can not solicit funds for a business opportunity, abandon that business, and then disappear with the money investors provided you.
What Is The Legal Recourse For An NFT Rug Pull?
Usually zero. The NFT space is not a regulated sector, and the scammer will have pre-planed their exit strategy to cover their tracks. Even if you can find who did this, you would need to prove it and start legal proceedings in a jurisdiction that might prove problematic. Basically, your money is gone, and so is the scammer.
It is not unknown for the same scammer to rinse and repeat the same scam multiple times using different social media and artwork.
There is a light at the end of the tunnel.
If the rug pull scammer is careless and doesn’t cover their tracks well, they can get caught! Authorities around the world are starting to take this scam seriously too.
For example:
The Frosties NFT rug pull scam. What happened?
This scam netted $1.1 million!
Frosties NFTs were a quirky, hyped, and professional-looking NFT collection. They proved popular, and the scammers promised many things to their investors.
Frosties promised investors rewards, tokens, mint passes, giveaways, and even a working game!
Instead, they stopped the project. The scammer closed down their discord and Twitter accounts and tried to vanish.
Why would the rug scammers abandon the project so quickly and not keep the scam going a little longer?
They were in the middle of launching a new NFT (scam) project when they got caught! If it worked well once, why not try it again? Rinse and repeat.
The scammers used multiple exit digital wallets and stealth transactions, also known as washing.
However, they were sloppy and didn’t cover their tracks well enough.
Ethan Nguyen and Andre Llacuna (both 20 years old) were charged with conspiracy to commit wire fraud and money laundering. They now face 20 years each in prison.
Hopefully, this will serve as a warning to others thinking about creating an NFT rug pull. It’s not a harmless crime. Real people invest hard-earned capital into these projects. Losing your investment can affect a person’s lifestyle and mental health, not to mention every rug pull or exit scam results in lasting damage to the reputation of NFT and the crypto space.
Read more about the Frosties NFT scam here.
The department of justice is currently dealing with over $100 million of NFT (scam) cases. Although on the surface this is not a good thing, it is promising as it means these criminals are being caught. The DOJ is serious about more international cooperation in future cases.
How Much Money Can An NFT Rug Pull Make?
Life changing money!
An example:
The scammer’s overheads are surprisingly low. You can buy an NFT collection from an artist for less than $1,000. Slightly more if you want better artwork and the potential for more money.
Social media accounts are free to set up.
The scammer will buy thousands of social media followers and bots to repost and like their posts to create the illusion that the NFT collection is popular.
This will only cost the scammer a couple of thousand dollars.
There is a small cost of setting up a website, although many scammers don’t even bother to do this! They need only to create a discord channel and Twitter account. Website coming soon! Wink wink.
Other NFT scammers have gone as far as to create secondary websites for staking the NFTs and kept the scam going longer to milk the secondary royalty fees, which can be as much as 10% of every NFT sale!
The total cost of a convincing scam can be less than $5,000.
How much does the scammer make from their $5,000 investment?
It depends on the market conditions, popularity of the collection, how many NFTs there are, secondary sales, and if the mint sells out.
Usually, the NFT collection will consist of 10,000 NFTs. The scammer may give away a few of the mints to NFT influencers to try and increase the number of people wanting to mint. The goal is to mint out all 10,000 NFTs!
I will be conservative on how much the NFT rug pull makes.
10,000 NFTs with a mint price on the Solana network of three SOL each. Let’s assume a price of $50 per SOL. If the NFT collection fully mints out, the scammer can make $150 per NFT sold. The total could be as much as $1,500,000 dollars, or 30,000 SOL, minus some costs!!
Now the scammer might decide to disappear or continue to milk investors. The scammer sets a royalty fee of 10% per NFT sold on an NFT marketplace.
Sometimes the scammer will allow the project to continue for a few weeks, and the volume can run into thousands of NFTs bought and sold within this time frame. If one NFT sells for $1,000, the scammer can make 10 percent of this for every NFT sold. In a bullish market – the same NFT can change hands multiple times a week!
On the Ethereum blockchain where the most valuable NFTs are bought and sold this can quickly add up.
Now you can see why there have been many NFT rug pulls!
What Were The Biggest NFT Rug Pulls In History?
Here is a list of four of the largest NFT rug pulls.
1. Baller Ape Club NFTs on the Solana blockchain
They minted 5,000 apes at 2 SOL each. They didn’t hang around, and ten minutes after the NFT collection had sold out, they deleted their Twitter and discord social media accounts. They didn’t issue a single NFT to their holders and took $2.2 million from investors.
2. A serial rug puller
This scammer rug pulled his investors not once but three times! He even hung around on Twitter afterward to laugh at everyone. The most shocking part is this scammer decided to lecture everyone on how intelligent he was and how he wanted to help the community avoid future rug pulls.
I won’t be shocked to see this scammer do this a fourth time one day.
He was behind the famous doodled dragons, balloonsville, and the reptilian renegade’s rug pulls.
It is unclear how much he made for all three rug pulls, but they were popular collections. We can assume over $1 million.
3. Evolved Apes NFTs
This scammer sold 10,000 evolved apes NFTs on the Ethereum network and made off with a shocking $2.7 million in Ethereum!
4. A one of one Banksy NFT
Banksy is a well-known British artist who’s artwork can sell for millions of dollars per piece.
A link was created to a website saying that a Banksy NFT was being auctioned off. One investor jumped onto it and paid $336,000 for the NFT. It tuned out to be fake.
What Is A Slow NFT Rug Pull?
A slow NFT rug pull is when an NFT creator sells their NFTs to investors and often promises the world in their roadmap. Investors keep buying the NFTs, believing in the project, and the creators receive not only mint money but royalties on all secondary sales.
The NFT creator doesn’t disappear overnight. Instead, they do nothing except the odd tweet and promise, which never comes to fruition.
Over time the NFT investors get bored and frustrated as promises are not delivered. They finally give up on the project, and the scammer gets to keep all the money and occasionally receives more money as the odd NFT sells to new investors who don’t realize the project has, in all essence, been abandoned.
How To Avoid An NFT Rug Pull?
NFT rug pull red flags (warning signs)
Here are some things you can do to help you decide if you want to invest and if the NFT project is legitimate.
The more red flags you come across, the warier you need to be!
1. The Founding Team
Is the NFT project and team doxxed?
This is a crypto saying which means … are the identities of the team known, as opposed to being anonymous?
Having an anonymous team for an NFT project is not uncommon. Some large and popular NFT projects have unknown founders. Unfortunately, this is acceptable behaviour in the crypto and NFT world, and NFT scammers take advantage of this fact!
The solution:
If you are a conservative investor, you might decide you will not invest in any project that has an anonymous team. You will miss out on some solid NFT projects, but you will reduce the chance of investing in a rug pull.
What if the team is known?
This makes life far easier!
Once you know the names, you should look at each team member’s social media profiles and how professional and experienced they are within this industry.
Have they been involved in past successful or unsuccessful projects in this space?
How experienced is the head developer? Are they good enough to fulfill the project’s roadmap?
Who is the NFT artist, and are they famous or new and inexperienced? If they are known, go and have a look at their past work and see if you and other investors like it.
Is the team following through on their promises? Check if the team is active and positive. Have they sent the giveaways they promised? When a team is reneging on their early promises – this should be a warning sign!
2. The Website
Check if the project has a website.
I know this sounds silly – however, you would be amazed how many NFT projects don’t even have a website.
Because this is not uncommon, it makes it harder to know if the NFT project is a scam or not. You will have to decide if you take a risk and invest with them before they even have a simple website.
What if they have a website?
Wonderful! Now you need to go onto their website and investigate.
Does the website URL start with HTTPS and have a padlock symbol next to it?
This is our website when you view the URL on a search browser. Ensure the NFT project has this. If not, then this is another red flag. You will have to decide how many red flags a project can have before deciding not to invest.
The age of website does matter
You can check a website age here
Spendingcrypto.com website looks like this
Investigate their domain name, when the domain name was purchased, and see who owns it!
You can use whois which is a free website!
Simply type in the domain name in the search box, and you will see all the information.
Go onto their website and check if the page links work. How many pages does the website have? Is it just a simple landing page?
Some NFT project websites are new, and some links may not yet work. It is not a red flag in itself, but the better the website functions, the more likely they have put some time and money into their web design.
Does the website have an about page explaining the project and listing the team members and their social media accounts like LinkedIn?
Do they have a contact us page? If so, try to contact the team and see how long they take to respond. If they don’t respond or you can’t contact anyone, this might be a warning sign for an investor.
A website is not an expensive thing to do well.
Has thought and effort been put into the website? How are the graphics? Is the content well writen and structured?
Does the website load quickly?
Have they spent money on basic SEO for the website?
Does the website look amateurish?
The more time and money spent on a website, the better!
Is the website well written, or does it have multiple spelling errors and looks like someone hasn’t spent time proofreading it?
If the website is in English, does it read as if a native speaker has written it?
A fantastic website that flows well and looks modern helps cement that the team cares about its image and is more likely to be a promising project.
Sometimes you may have found an early NFT project. It may not have a fully functioning website yet, but if most of the questions mentioned above are answered, you can make a more informed investment decision.
3. NFT Roadmap & Whitepaper
Does the NFT project have a roadmap or whitepaper explaining in detail, what the project is, and how they aim to achieve its goals?
The more you know about a project, the better. Understanding the roadmap and what it entails will give you an early warning sign if the team misses a deadline and doesn’t explain why!
4. A Projects Social Media Accounts
Every NFT project has social media accounts.
They will usually have at least a discord group, a Twitter account, and maybe a telegram group.
First, check who is in these groups. I always see if I recognise other NFT investors that I know on social media. Are they in these groups? If so, contact them directly and see what they have to say. This is why networking with other investors can help you understand a project more.
You can see how active the social media groups are. Are questions being answered in a clear and timely manner? You can ask questions in these groups too.
Go to the chat room in the telegram and discord channels and chat with other investors. Learn more about this project.
Check their Twitter account and see how old it is. Are they posting good content or simply retweeting other people’s tweets? Scroll down to the first post the project tweeted. Sometimes you will see a Twitter account with only a few posts and this could be a red flag. Are they informative and good-quality posts?
I will often test an NFT project by tweeting using the project’s handle in my tweet. Do they notice and respond to your tweet?
What are other investors commenting on the team’s posts? Is it negative or positive? You can learn a lot by reading the comments section!
It is easy to buy fake followers for your social media accounts! Do you think the project has bought bot followers?
This is easy to ascertain. If a project has 100,000 “followers” and only a few comments on their posts, it is not a good sign!
You can also cross reference the project’s social media accounts and the number of followers each one has.
When an NFT project has 100,000 Twitter followers but only 500 active members in their discord, it is a red flag.
When looking at an NFT project’s social media, you are investigating to see what the engagement is like and how trustworthy it is. The higher the number of followers and the lower the engagement, the more red flags appear.
I have seen NFT projects with 200,000 plus followers that can barely get 10 likes or retweets. Not a good sign!
5. The NFT Community
What is the vibe in the community?
Does the team work hard to build trust with the community?
Are they respectful of questions and capable of answering them without starting an argument?
Is the team professional when dealing with their community and any questions or problems?
I will not invest in an NFT project if the team is rude, doesn’t respond or know simple answers, and conduct themselves in a less than professional manner. I’m out!
6. Discord Staff
NFT projects often hire members from the NFT community to help them run the discord for them. Are these well-respected people? If you know them, try to contact them and see if they respond.
7. The Artwork
This is very important. The artwork needs to be top-notch nowadays! Investors are more selective.
When you look at the artwork would you be happy making it your pfp for your Twitter account? Would you want to print this NFT onto canvas and hang it on your wall?
A great early sign is seeing people put this NFT collection as their profile picture, especially if well-respected NFT influencers change their pfp to this NFT!
If the artwork is poor or looks like a copy of another collection, it would be a red flag for me.
8. Take A Free Ride (De-Risk)
If you are investing in an NFT collection that is live, you can do what some veteran NFT investors do. De-risk early on!
If you like a particular NFT collection, you can mint or buy three or more of them, depending on your risk appetite.
As soon as you can sell one of these NFTs and cover the cost of your initial capital deployed, the less you need worry about how it performs.
Let’s say you pay $500 per NFT, and you bought three of them. Your Total outlay and risk is $1,500. If the NFT floor goes to three times your initial investment, you can sell one and cover most if not all of your $1,500. Now you can decide when to sell the second NFT and collect your first profit. The third can then be held or sold when the time is right.
9. Which Influencers Are Involved?
When NFT projects launch, some will have well-known influencers involved.
Are the influencers involved in the NFT project respected?
Do they have a good reputation, or will they hype the NFT collection to their followers as exit liquidity?
Having NFT influencers involved in a project does not mean it is legitimate. Influencers often receive money or free NFTs for shilling a project.
What you are looking for is, are there any influencer’s names attached to the project, and how have past projects these influencers been involved in turned out? Were they profitable? Did the team perform?
The more time you spend in the NFT space, the more knowledge you will have of which influencers to follow and trust.
10. Second Generation NFT Collections And A Potential Cash Grab
Have you found an NFT collection to invest in? Has it performed well in the past but appears to have stalled?
Do you like the artwork, but the NFT founders seem to be AFK most of the time? Have they announced a fantastic second-generation mint or an airdrop to holders of the first-generation NFTs?
It is tempting to jump in and buy a few first-generation NFTs so you will receive the airdrop of a potentially valuable second-generation NFT.
Sometimes this works out well. Sometimes it doesn’t.
For example:
Degen Apes dropped each holder an NFT egg, which is worth more than the first-generation NFTs! However, this is not always the case.
If an NFT collection looks like it could be a slow rug pull, and they suddenly announce a second-generation mint or airdrop, you need to do some investigating.
Has the team delivered on its roadmap promises?
Are the NFT holders happy?
What value will this second-generation bring to the original project?
Although some NFT projects use second-generation collections to help fund their roadmap or breathe new life and new investors into their project. So, it can be a great win/win. However, if any red flags appear while investigating, it may be better to leave this and find a better project.
What do you do if you think an NFT project is a rug pull?
Report an NFT Scam
You can contact the NFT marketplace where the NFTs are listed and alert them.
For example, on the Magic Eden NFT marketplace, you can flag a collection by pressing the flag button – which is on every NFT collection listed there.
For example, on Twitter you can report their account.
You could start to compile evidence and investigate red flags and try to warn others to be careful.
If you are American, contact the NFT scams and fraud department and report the project. They even allow anonymous reporting through their social media accounts.
If you are in the UK you can report a cyber crime here.
Final thoughts ….
As the old adage goes, if it sounds too good to be true, then it probably is.
We wrote this article to help new NFT investors become more prepared and informed and to use the advice above to help you stay safe.
Remember …. always protect and preserve your initial capital!
Would You Like To Learn More About NFTs?
Have a look at the extensive NFT resources section of our website to learn more about this industry and find links you will need to help you become a more informed investor.
Thank you for reading this and we hope you have found this useful. Please share this with your friends and on your social media. Thank you!
If you are looking to create an NFT project, or you would like help marketing your existing one please contact us. We work closely with DeWay Media which is a collective of NFT investors and marketing , and media specialists.
Would you like to learn where to spend your cryptocurrency, or learn more about this fascinating topic? Visit us today at spendingcrypto.com
Author:
Jonathan Titley
Founder:
spendingcrypto.com
Co-founder:
https://fomomagazine.io
(NFT industry magazine and project reviews)
Disclaimer:
All information in this article is for educational purposes only.
