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Experts warn against ‘pulling the encrypted rug’

ICYMI: Here’s a warning, from News agencyOn “pulling up the crypto rug” and how it could lead to more pain in the cryptocurrency markets:

A new type of fraud has emerged in the hype-filled world of cryptocurrency: “pulling the rug.”

The scam, whose name is derived from the phrase “pull the rug,” involves a developer who lures investors into a new cryptocurrency project, then withdraws before the project is built, leaving investors with a worthless coin. It is part of a long history of investment plans.

“This is not just a crypto phenomenon. This is a people phenomenon. Crypto is the newest way to do this,” says Adam Bloomberg, a Houston-based certified financial planner who specializes in digital assets. But cryptocurrencies have their own risks due to loose fundraising regulations and their focus on decentralization.

Cryptocurrency projects often use “smart contracts,” which are agreements that are governed by computer software, rather than the legal system. This setup can come in handy when it reduces transaction costs, but it also leaves little recourse if things don’t work out.

Rug pulls have been particularly common in decentralized finance, or DeFi, projects that aim to disrupt services such as banking and insurance. NFTs, or non-fungible tokens, that provide digital ownership of art and other content, have also participated in rug pulls.

Investors can protect themselves by choosing cryptocurrency projects, making sure to review the code of any new project and verify the identities of the developers.

Rug pulls are more common with new projects that haven’t come under the same scrutiny as more established cryptocurrencies.

Bitcoin has its risks, but countless people around the world have used it and reviewed its inner workings, which are readily available online. Newer projects do not have such a track record, which means that there may be weaknesses that make it possible for their regulators to dump value away from investors and keep it for themselves.

If you’re struggling to break through the hype, one way to find existing projects is to look at centralized exchanges like Binance, Coinbase, and FTX. While the presence of a cryptocurrency on a large exchange in no way guarantees its quality or the possibility of investing in it, these companies often review assets before offering them for sale.

The trade-off of investing primarily in more established assets: While cryptocurrency, in general, has experienced periods of rapid price appreciation, the highest rewards may come from new ventures where the stakes are also higher.

They are often listed on “decentralized exchanges,” which are not dependent on any central authority that would prevent unverified projects from joining.

Rex Highgate, founder of DeFiSafety, a company that reviews projects in the field, says scammers can prey on the fear of getting lost out of rare but true stories of staggering returns. “It’s seductive. People have made a lot of money. It’s a fact,” Hygate says.

“The hope is real, albeit small, that (and therefore) criminal organizations in an organized and regular manner are pulling this rug out.”

The fate of any investment in a cryptocurrency or blockchain project depends on the integrity of the project’s computer code. You may not be a computer programmer, but you should at least understand how the product works before investing in it.

One way to assess a potential investment without succumbing to yourself is to see if it has been audited by a professional organization that is respected in the industry. Projects that get good marks from reviewers often promote the same results.

Some of the biggest red flags in the cryptocurrency world are due to human factors.

While it is not unheard of for people to use pseudonyms in cryptocurrency, reputable developers often have websites and references that can generate their credentials.

But even if you do your homework, there is no guarantee of success. For example, Rugdoc.io, a service that reviews new projects, says it was duped itself into an NFT that was supposed to be a ticket to an event.

Diversification is just as important in cryptocurrencies as anywhere else in finance. Projects can fail due to technical errors or commercial errors, even without malicious intent.

“I assume whatever you invest in is going to have a problem,” says Leah, the founder of Rugdoc.io, who asked that her full name not be used to protect her identity from scammers seeking revenge. “If you plan to fail, and if you don’t, you will have a very good day. If you fail, you probably won’t be ruined.”

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