In the world of crypto assets (also known as virtual currencies), a token from a project you supported can suddenly become worthless overnight. One of the most common causes behind this is an exit scam known as a "rug pull."
A rug pull refers to the act of a crypto project's operators suddenly withdrawing the funds raised from investors and the liquidity needed for trading, then disappearing with the money. Because the price can collapse to near zero in an instant, many investors do not realize what has happened until it is too late.
As the technical barrier to issuing a token has fallen, it is said that new tokens designed for this kind of scheme are appearing more easily than before. This is exactly why understanding how rug pulls work and how to spot them in advance is the first step toward protecting your own assets.
This article explains in detail what a rug pull means, the main types of tactics used, how to spot the warning signs to avoid becoming a victim, and what to do if you are affected.
What You'll Learn in This Article |
|---|
|
What Is a Rug Pull?
The term "rug pull" comes from the English expression "to pull the rug out from under someone." Taken literally, it means yanking a rug out from under someone standing on it, causing them to lose their footing all at once — and it is used as a metaphor for something that seemed to be going well suddenly collapsing.
In the crypto space, a rug pull is a general term for scams in which a project's operators abscond with investors' funds. The operators issue a new token to attract investors, and once the price and trading volume have built up momentum, they withdraw the assets and disappear. What remains for the investors left behind is a token that can be neither sold nor used.
Several structural factors are said to make rug pulls particularly common in the crypto industry.
- Anyone with the right technical knowledge can issue their own token relatively easily.
- Decentralized exchanges (DEXs) can allow tokens to be listed without any review process.
- Operators can act anonymously, making it difficult to trace their identity.
- Because this is such a new area of technology, regulations and rules have not always kept pace.
While this environment provides fertile ground for technological innovation, it can also serve as convenient cover for operators acting in bad faith. Note that while a rug pull is a type of investment scam, it differs in mechanism and positioning from similar-sounding terms such as a Ponzi scheme and a scam coin.
How It Differs From a Ponzi Scheme or a Scam Coin
"Rug pull," "Ponzi scheme," and "scam coin" are all terms related to crypto fraud, but they refer to different layers of the same problem.
Term | What It Refers To | How It Collapses |
|---|---|---|
Rug pull | The "tactic" of operators withdrawing funds or liquidity | The price collapses to near zero in an instant |
Ponzi scheme | The "structure" of funneling new investors' money to pay existing investors | It gradually collapses once new money stops flowing in |
Scam coin | The "token itself," which has no real substance or value | The asset itself has no value to begin with |
To sum up the relationship: a rug pull is the typical "tactic" by which a scam coin — the "asset" — crashes in value, while a Ponzi scheme refers to the "structure" of continuing to raise funds under the guise of paying dividends. A key difference is that a Ponzi scheme heads toward collapse gradually over time, whereas a rug pull loses its value the instant the operators withdraw.
Main Rug Pull Tactics and Types
A rug pull is not carried out in just one way. It can range from highly malicious schemes that build fraudulent mechanisms directly into a token's design, to cases where it is difficult to say for certain that any law has been broken. These can be divided into several distinct types.
First, let's cover the core question at the heart of a rug pull: why can the price collapse to zero in an instant? On decentralized exchanges, funds are deposited into a "liquidity pool" that pairs a token with another crypto asset (such as Ethereum), and trades are executed against that pooled capital. When the operators withdraw all the funds from this pool at once, the backing for trades disappears, and the token's price effectively collapses to zero. This is the basic mechanism behind a rug pull.
Building on this mechanism, rug pull tactics are commonly discussed in terms of three broad types. Because each results in harm in a different way, let's look at them one by one.
Hard Rug Pulls
A hard rug pull is a highly malicious type in which the intent to steal funds is built into the token's design from the outset. Because it relies on technical mechanisms, it is characteristically difficult to detect just by looking at the surface. Some of the best-known techniques include the following.
Technique | Description |
|---|---|
Liquidity withdrawal | The operators pull all the funds out of the liquidity pool at once, crashing the price. |
Honeypot scheme | Investors can buy the token but are programmatically restricted from selling it, creating a situation where only the operators can cash out. |
Backdoor abuse | A hidden function that allows unlimited minting of new tokens, or a hidden authority letting the operators move funds, is built into the code in advance. |
Because all of these involve technical manipulation, this is a category that is difficult for ordinary investors — who cannot inspect the code itself — to detect in advance.
Soft Rug Pulls
A soft rug pull refers to a type in which the operators effectively betray investors by walking away, even though it is difficult to point to a clear technical violation.
One example is when operators sell off a large amount of their own tokens on the market all at once, crashing the price, and then disappear. Even if the token's design itself contains no fraudulent mechanism, ordinary investors can still suffer major losses when insiders holding privileged information sell out from under them.
Soft rug pulls also include cases where operators simply abandon a project while keeping the funds they raised, deleting the official website and social media accounts and becoming unreachable. It is worth noting that the line between technical fraud and simple business failure can be blurry in these cases.
Rug Pulls Involving NFTs
Rug pulls occur not only with tokens but also with NFT (non-fungible token) projects.
A typical pattern involves selling NFTs backed by appealing artwork and an ambitious roadmap, only for the operators to abandon development and disappear once they have collected the sales revenue. Even though development of a game or community was promised, only the funds get withdrawn, leaving buyers holding NFTs that have lost their value.
Projects that tout flashy promotion or the involvement of celebrities tend to attract more attention, which is said to make the resulting damage more widespread as well.
Real-World Examples of Rug Pulls
Past cases make it easier to picture how a rug pull actually unfolds.
One well-known international case is a token called SQUID, issued in 2021. It was an unofficial token riding on the popularity of the Netflix series "Squid Game," and it drew attention on the back of the show's popularity, with its price briefly surging past $2,861 (Source: Forbes JAPAN official site, in Japanese).
At the same time, a wave of reports emerged from token holders saying they could not sell the SQUID they had purchased. A later investigation by a blockchain analytics firm found that SQUID's smart contract had reportedly been designed so that no one other than its creator could effectively sell the token (Source: TRM Labs).
The creator then withdrew the funds from the liquidity pool, and SQUID's price crashed to nearly zero. News outlets have estimated the withdrawn funds at roughly $2.5 million to $3.38 million. The project's website and social media accounts also became unavailable, and its operators became impossible to reach. SQUID is widely cited as a textbook example of a rug pull, in which ordinary holders were restricted from selling while the operators withdrew the funds.
Beyond this case, similar incidents have been reported internationally involving DeFi projects and NFT ventures in which operators raised funds, then abandoned the project and made off with investors' money.
How to Spot a Rug Pull: Warning Signs
While rug pull tactics have grown more sophisticated, there are still several warning signs you can check for in advance. Before deciding to invest, use the checklist below to see whether anything raises concern.
Category | Check Point | Warning Sign |
|---|---|---|
Team | Developer identity and track record | Completely anonymous, with no verifiable track record |
Team | Third-party audit | Has not undergone a safety check by an external body |
Token design | Liquidity lock | Operators can withdraw liquidity at any time |
Token design | Holder distribution | A very small number of addresses hold a large share of the supply |
Token design | Ability to sell | Even small amounts cannot be sold (possible honeypot) |
Marketing and price action | Yield claims | Promises of guaranteed principal or unrealistically high returns |
Marketing and price action | Price and trading volume movement | Unnaturally rapid price spikes over a short period |
Marketing and price action | Style of promotion | Excessive social media promotion or heavy emphasis on celebrity involvement |
You can check many of these points yourself, to some degree, using tools that let you view blockchain transaction history or services that offer a simple safety check for a token. While it is difficult to catch everything with certainty, simply avoiding projects where multiple warning signs overlap can significantly lower your chances of becoming a victim.
Measures to Help Prevent Rug Pull Losses
There is no foolproof way to completely prevent rug pulls, but there are habits that can lower your chances of falling victim to one. The foundation is not to outsource your investment decisions to others, and instead to verify information for yourself.
First, make it a habit to always check the warning signs covered in the previous section before investing. Beyond that, keeping the following points in mind can further improve your safety.
- Start with a small amount, and avoid concentrating your assets in a single coin.
- Do not take claims like "guaranteed profit" or "limited-time only" at face value.
- Look up publicly available information yourself, including the issuer, the team behind the project, and whether an audit has been conducted.
- Choose reputable exchanges and projects with an established track record.
Another point that is surprisingly easy to overlook is managing wallet "approvals." If you leave in place the token permissions you granted when using a decentralized service, a malicious project could use them to withdraw your assets. As a precaution, periodically revoke any approvals you no longer use. For step-by-step instructions, see "Revoke.cash: How to Revoke Token Approvals."
What to Do If You Become a Victim of a Rug Pull
Even with sufficient caution, it is not always possible to avoid becoming a victim entirely. If you do fall victim to a rug pull, stay calm and consider taking the following steps.
The first thing to do is preserve evidence. Keep records as thoroughly as possible of your transaction history, the destination and token addresses, and any communications with the project's official website or social media accounts. These will serve as important documentation when consulting an authority or filing a report.
Beyond that, you may consider consulting public support channels in Japan such as the police or a local consumer affairs center (shohi seikatsu center), a public consultation desk available to residents in Japan. In practice, however, recovering funds that have already been withdrawn is said to be extremely difficult. Be wary as well of secondary scams from people who approach you claiming they can get your money back.
From a tax standpoint, the treatment of crypto asset losses under Japan's system can be difficult to understand. Under the rules in force as of July 2026, gains on crypto assets in Japan are treated as miscellaneous income subject to aggregate taxation, and losses can be offset only against other miscellaneous income — unlike losses on listed stocks, they cannot be offset against employment income or other income categories. How a loss from fraud should be handled in your final tax return (kakutei shinkoku) varies depending on the circumstances, so if you are unsure, it is advisable to consult a licensed tax accountant (zeirishi) or another qualified professional in Japan.
Frequently Asked Questions (FAQ)
There are several points that commonly raise questions about rug pulls. Below, we answer the questions we hear most often.
Is a Rug Pull a Crime?
Depending on how it was carried out, a rug pull could potentially be charged as fraud or as a violation of Japan's Payment Services Act (PSA), the law that regulates crypto asset exchange services in the country. That said, some cases are difficult to distinguish from a simple business failure, and the legal assessment varies depending on the specific circumstances. For a concrete judgment, consulting a professional such as a lawyer is the surest approach.
Can I Recover Funds Lost to a Rug Pull?
In practice, recovering funds that have already been withdrawn is said to be extremely difficult — even more so when the operators are anonymous and the assets have been dispersed overseas or across multiple addresses. Also be cautious of secondary scams from parties who approach you claiming they can get your money back.
Are All Memecoins Rug Pulls?
Not necessarily. While some memecoins created purely to generate buzz have been exploited for rug pulls, not all of them are scams. It is important to check each coin individually, looking at factors such as its liquidity and the transparency of its operating team.
Summary
A rug pull is an exit scam in which a crypto project's operators suddenly withdraw funds or liquidity and disappear. Its tactics range widely — from hard rug pulls, in which fraudulent mechanisms are built into the token's design, to soft rug pulls, which involve operators selling off their holdings or simply abandoning development.
The single most important thing for avoiding harm is knowing the warning signs and making it a habit to check them yourself before investing. Simply checking points such as whether liquidity is locked, how transparent the operators are, whether an audit has been conducted, and whether you can actually sell the token can substantially reduce your risk.
New technology brings great potential, but also new risks. There is no need for excessive fear — but it is worth keeping in mind that "if something seems too good to be true, it might be," and cultivating the calm judgment needed to tell the difference.
This article is for informational purposes only and does not constitute financial or investment advice. Please consult a qualified professional before making investment decisions.
