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A new type of scam has emerged in the hype-filled world of cryptocurrency: the “rug pull.”
The scam, which gets its name from the expression “pulling the rug out,” involves a developer attracting investors to a new cryptocurrency project, then pulling out before the project is built, leaving investors with a worthless currency. It’s part of a long history of investment schemes.
“This isn’t a crypto-only phenomenon. This is a people phenomenon. Crypto is just the latest way to do it,” says Adam Blumberg, a Houston-based certified financial planner who specializes in digital assets. But cryptocurrencies have particular risks due to loose regulations for fundraising and their emphasis on decentralization.
Cryptocurrency projects often use “smart contracts,” agreements that are governed by computer software, not the legal system. This setup can be a benefit 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 been involved in rug pulls.
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Investors can protect themselves by choosing established cryptocurrency projects, making sure the code of any new project has been reviewed and verifying the developers’ identities.
PICK ESTABLISHED PRODUCTS
Rug pulls are most common with new projects that haven’t gotten the same scrutiny as more established cryptocurrencies.
Bitcoin has its risks, but countless people worldwide have used it and reviewed its inner workings, which are readily available online.
Newer projects don’t have such a track record, which means there may be vulnerabilities that make it possible for their organizers to siphon value away from investors and keep it for themselves.
If you’re struggling to break through the hype, one way to find established projects is to look at centralized exchanges such as Binance, Coinbase and FTX. While the presence of a cryptocurrency on a large exchange is by no means a guarantee of its quality or investment potential, these businesses often will review assets before listing them for sale.
FILE – This April 3, 2013, file photo shows bitcoin tokens in Sandy, Utah. The Cuban government said Thursday, August 26, 2021, that it will start recognizing cryptocurrencies like Bitcoin as payment. With investors eager to get in early on new cryptocurrency projects, some unscrupulous developers have attracted investments, then walked away before building what they promised — leaving their supporters with worthless holdings. The rug pull, which gets its name from the expression “pulling the rug out,” is part of a long history of investment schemes. But cryptocurrencies have particular risks due to loose regulations for fundraising. (AP Photo/Rick Bowmer, File)
The trade-off of investing primarily in more established assets: While cryptocurrency, in general, has seen periods of rapid price appreciation, the highest rewards may come from new projects where the risk is also higher. These are often listed on “decentralized exchanges,” which don’t rely on any centralized authority that would prevent unproven projects from joining.
Rex Hygate, founder of DeFiSafety, a company that reviews projects in the field, says scammers can prey on the fear of missing out that’s generated by rare but true stories of mind-blowing returns.
“It is seductive. People have made a lot of money. That is a fact,” Hygate says. “The hope is real, albeit small, (and) therefore criminal organizations in an organized and regular manner are making these rug pulls.”
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 computer programmer, but you should at least understand how a product works before investing in it.
One way to evaluate a potential investment without going under the hood yourself is to see if it’s been audited by a professional organization that is respected in the industry. Projects that have gotten good marks from auditors will often promote the results themselves.
RESEARCH THE PEOPLE
Some of the biggest red flags in the cryptocurrency world come down to human factors.
While it’s not unheard of for people to use pseudonyms in cryptocurrency, reputable developers often have websites and references that can establish their credentials.
But even if you do your homework, there’s no guarantee of success. For example, the founder of Rugdoc.io, a service that reviews new projects, says she wound up getting scammed herself on an NFT that was supposed to be a ticket for an event.
Diversification is as important in cryptocurrency as anywhere else in finance. Projects can fail due to technical glitches or business blunders, even without malicious intent.
“Assume whatever you’re investing in is going to have a problem,” says Leah, the Rugdoc.io founder, who asked that her full name not be used to protect her identity from scammers seeking retribution. “If you plan for failure, if it doesn’t fail you’re going to have a very good day. And if it fails, you’re probably not going to be ruined.”
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8 tactics to break credit card debt cycles
Strategies for managing credit card use
Upon paying off between $12,000 and $15,000 in credit card debt in 2019, Yamiesha Bell, a special education teacher in New York, didn’t break up with her credit cards.
With goals to buy a car and a house, Bell hoped to preserve her credit history by keeping her cards open and active.
“I needed to sustain my credit in order to get the interest rates I wanted in the future,” she says.
While credit cards aren’t ideal for everyone, they can aid your credit journey if used responsibly. When reconciling with credit cards, you need a personalized stay-out-of-debt plan. Here are a few strategies to consider.
1. Reflect on spending habits
Maybe you ditched debt, but history can repeat if you don’t unpack the motivations that contributed to it. A get-out-of-debt plan that works in the short term may not be sustainable over the long term if it doesn’t align with your priorities, according to Julia Kramer, a financial behavior and leadership consultant at Signature Financial Planning in Pennsylvania.
Kramer suggests tracking transactions dating back a week or more. Add a plus sign next to those purchases you’re willing to repeat and a minus sign next to those you’re not. For obligatory purchases like gas and groceries, add an equal sign.
Note the date, the item purchased, the amount and the need the purchase met. Those frequent lattes or meals out with friends may be more about the personal connection experienced, or something else, as opposed to the gratification provided by the item, according to Kramer.
This information is key to identifying areas in your budget that are negotiable. For example, you may be more willing to choose budget-friendly food in order to keep a facial that meets an internal need for self-care and connection, Kramer says.
If your spending strays upon experiencing feelings like anxiousness or boredom, make a plan for those occasions. It might mean budgeting extra money or employing tricks like using a credit card lock feature to prevent spending.
2. Use cash for certain categories
If you want to reel in spending on categories like dining out or entertainment, for example, set aside physical cash to stay within budget. Money in hand can lead to more mindful spending, according to Kramer.
3. Track spending
Create a tracking system that works for you. Setting up spending alerts on a credit card account can notify you if purchases exceed a certain amount. Tracking spending with a spreadsheet, bullet journal or budgeting app, for instance, can also help with mental accounting.
“I would not open up credit cards if you do not have a system in place where you track spending every month,” Kramer says. “It has to be something that appeals to you that you know you’re going to do.”
For Bell, a cash envelope tracking system helps her manage spending in different categories, including her credit card bill payment.
“When you look in a cash envelope and you see you only have $50, it’s very clear that once that money runs out there’s nothing else I can do,” she says.
4. Use credit cards for planned purchases only
Ease your way back into credit cards with small planned purchases, like a subscription service payment.
After paying off debt, Bell only uses credit cards for in-budget purchases, and she pays them off in full each month to avoid interest charges. Initially, she left her credit card at home to avoid relying on it.
5. Have an emergency fund to fall back on
An emergency fund of even $500 for a car or home repair may keep debt off of your credit cards. Start small and aim, eventually, to cast a wider safety net over time — ideally, three to six months of living expenses stowed in a high-yield savings account.
If you previously got used to budgeting a certain amount each month to pay creditors, keep that momentum going, but direct funds toward savings instead.
6. Don’t store credit card info on websites or apps
Convenient payment options can sometimes lead to mindless spending. By entering payment information into forms for every online purchase, you’ll have more time to think through a purchase.
7. Get an accountability partner
A nonjudgmental partner or trusted loved one can offer input on a purchase or a stay-out-of-debt plan. An accountability partner can be a sounding board that lets you listen out loud to your own justifications for financial decisions.
8. Update your strategy
As motivations and priorities change, your stay-out-of-debt plan should follow. Continue revisiting credit card statements to identify the needs that are being met by purchases and which are most important.
If in this process you continue having frequent run-ins with debt, consider closing credit card accounts even if it can negatively impact credit scores.
“A big thing about this is knowing yourself and knowing what your challenge areas are and finding ways that work around them,” Bell says. “Five years from now it might look different, but for right now that’s what works.”
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