Cryptocurrencies are all about blockchain technology, which means that a token needs to power a particular network to hold value. For example, ETH tokens are viable investments because of the power of the Ethereum network. The network has become highly popular in decentralized finance and even created an argument that ether can be used as a store of value.
Example of a Scam Token
Many popular tokens have the same functionality as Ethereum. However, others launch in the market without any backing, model, or technology. A good example of this is Floki Inu, which recently rug pulled on its investors.
The token popped up after Elon Musk tweeted that he would name his Shiba Inu dog “Floki.” This created excitement around Shiba Inu, but others took advantage of this and launched a token known as Floki Inu.
Floki Inu’s market cap pumped to $3 million, but FUD surrounding the coin led to a crash below $200K. An insider in the Floki Inu project drained its liquidity pool amidst the crash leaving only 0.25 ether. This led to losses for both liquidity providers and investors.
How to avoid Rugpulls
Floki Inu is just one of numerous examples of token scams that have devastating effects on crypto investors. However, there are several precautions you can take to avoid falling victim to these coins.
The first thing you need to check is the project’s whitepaper. If a token does not have a whitepaper, that is a red flag. If it has a whitepaper, go through it to understand the concepts, models, and project objectives. The whitepaper should also contain a roadmap to growth in the long run. Question everything in the whitepaper, do the claims make sense?
The other thing you need to check is the token sale or Initial Coin Offering (ICO). You need to monitor the progress of its token sale to see the amount that investors have contributed and the duration the sale is expected to last. These token sale figures should be readily available if the token is legit. However, if the progress of the ICO is hidden, this is also another red flag.
Most importantly, it would be best if you exercise caution. Projects that look too good to be true are most likely scams. One of the well-known token scams, PlexCoin, had a solid whitepaper and an ICO where it raised over $15 million before being shut down by the US Securities and Exchange Commission for fraudulence.