In the hectic world of cryptocurrency, a new type of fraud has emerged: “carpet pulling.”
The scam, which got its name from the expression “pull out the rug,” suggests that the developer attracts investors to a new cryptocurrency project and then exits it before the project is built, leaving investors with a paltry currency. This is part of a long history of investment schemes.
“It’s not just a crypto-phenomenon. This is a popular phenomenon. Crypto is just the newest way to do it, ”said Adam Bloomberg, a certified financial planner from Houston who specializes in digital assets. But cryptocurrencies have special risks due to easy fundraising rules and their focus on decentralization.
Cryptocurrency projects often use “smart contracts,” agreements that are governed by computer software rather than the legal system. This setup can be beneficial if it reduces transaction costs, but it also leaves no room for recourse if something fails.
Carpet pulling has been particularly common in decentralized finance or DeFi projects that aim to disrupt services such as banking and insurance. NFT, or indispensable tokens that provide digital mastery of art and other content, are also involved in carpet pulling.
Investors can protect themselves by choosing well-known cryptocurrency projects, making sure that the code of any new project has been reviewed and verifying the identities of the developers.
Choose standard products
Carpet pulling is most common with new projects that have not received the same attention as the more well-known cryptocurrencies.
Bitcoin has its risks, but countless people around the world have used it and viewed its internal work, which is readily available online.
New projects do not have such a track record, which means there may be vulnerabilities that allow their organizers to suck value out of investors and keep it to themselves.
If you find it difficult to break through the hype, one way to find established projects is to look at centralized exchanges such as Binance, Coinbase and FTX. Although the availability of cryptocurrency on a major stock exchange is by no means a guarantee of its quality or investment potential, these businesses often review assets before putting them up for sale.
The trade-off is investing primarily in more established assets: while cryptocurrency, in general, has seen periods of rapid appreciation, the greatest reward may come from new projects where risk is also higher. They are often included in the list of “decentralized exchanges” that do not rely on any centralized bodies that would prevent them from joining unverified projects.
Rex Highgate, founder of DeFiSafety, a company that reviews projects in the field, says fraudsters can hunt for fear of losing money, which is generated by rare but true stories of staggering profits.
“It’s tempting. People made a lot of money. That’s a fact, ”Hygate says. “Hope is real, albeit small, and (and) so criminal organizations are organized and make these rugs regularly.”
Know the code
The fate of any investment in cryptocurrency or blockchain projects rests on the integrity of the project’s computer code. You may not be a programmer, but you should at least understand how a product works before you invest in it.
One way to evaluate potential investments without going under the hood yourself is to see if they have been audited by a professional organization that is respected in the industry. Projects that have received good marks from auditors often promote the results themselves.
Some of the world’s largest red flags of cryptocurrency are linked to the human factor.
While people use aliases in cryptocurrency, this is not uncommon, reputable developers often have websites and links that allow them to set their credentials.
But even if you do your homework, there is no guarantee of success. For example, the founder of Rugdoc.io, a service that reviews new projects, says she was cheated on NFT, which was supposed to be a ticket to the event.
Diversification is just as important in cryptocurrency as in other areas of finance. Projects may fail due to technical glitches or business errors, even without malicious intent.
“Let’s assume that what you invest in will have problems,” said Leah, founder of Rugdoc.io, who asked that her full name not be used to protect her identity from fraudsters seeking retribution. “If you plan for failure, if it doesn’t fail, you’ll have a very good day. And if you don’t succeed, you probably won’t lose. “
Andy Rosen is a writer at NerdWallet. Email: arosennerdwallet.com.