Can you sniff a rug pull?

Good morning! Welcome to The Daily Moon. It’s a brand new week. More Sam Bankman-Fried stories to entertain you. Apparently, FTX got hacked, it seems, and some unscrupulous people withdrew over $600 million. When it rains it pours and we, for one, can’t wait for the Netflix documentary.

Moving on, today we talk about the telltale signs of pump-and-dump and BlockFi’s withdrawal pause.

The markets were rattled by the FTX collapse. Bitcoin stayed below $17,000 while Ethereum was at $1,270 levels. Nasdaq rose on hopes of slower interest rate hikes. Back home, Sensex and Nifty gained after softer US inflation.

Pump And Fade

Heard of Squid Game, right? By the end of 2021, the Netflix series got super popular. Branded Squid Game merch was sold everywhere. And then almost overnight emerged a token. In the midst of hats, tshirts, and video games why not a token? To participate in the mania, you had to pay an almost insignificant amount — $0.01. But then demand and supply took over. The price started to rise. It went to $1, then $2. For a brief period of time, SQUID went from $628 to $2,800 in a 10-minute window. Now, can you imagine those who got in at $0.01. Incredible value created.

But seconds after it touched $2,800, the price collapsed to $0.0007. The project website vanished. The people running the website made close to $2 million. Not an insignificant amount.

You can call it whatever you like. A scam, a rug pull, a con job. It’s something the world of crypto brings with it. Not unlike other IRL con jobs, this just has a larger scale because of the internet. Chainalysis data showed investors lost more than $2.8 billion in rug pulls in 2021.

We need to talk about it right now, for one simple reason. We are living in a delicate economic reality. We’ve seen two major collapses in the past 10 months. We will see more. The risks people take right now are going to have far reaching consequences in the future.

It’s not just something that happened in the frenzy of 2021. There are others. Let’s try to take you through the patterns so you learn to spot them as well.

The pumpIt starts with a token. It can be anything, but something catchy that attracts users. It will have its roots in pop culture or traditional finance. Let’s say you spot a token called Potter. Then where it starts.

1. Developers upload a whitepaper on the internet with claims about its future and use cases.

2. Telegram groups start token pumps almost four to six weeks before launch. What’s discussed is how the token is so cool, the usability and the returns will be unbelievable.

3. Social media influencers start token promotions.

You hear of it everywhere. The price rises everyday. It is becoming difficult to ignore. FOMO takes hold. If you push back on social media, you see people making coherent and impassioned arguments on its use cases and the need for a decentralised token for Harry Potter fans.

You relent. You think it’s fine. The price is going up everyday. Interesting people you follow have bought it. Over the past 10 days, its price has gone from $1 to $100. And committing $1,000 isn’t too much. It won’t break you. Let’s do it.

Then the rug pullBut then things change. These accounts arguing disappear. The price plummets. From $100 it collapses to 1 cent and then dips further. The whitepaper is gone. Before you can make sense, you’re holding nothing.

Everyone believes that even if they’ve identified a rug pull, they will be able to sell it on the upward slope. It often doesn’t work that way. When the rug is pulled, it happens in a matter of seconds.

Spot the red flagsOk. So, now that we’ve persuaded you against playing the game. Let’s find the red flags.

• Don’t go by the name. If there’s a Jedi token, it doesn't mean that Disney endorses it. For instance, there was a Mando pump-and-dump in 2021 where users thought it was the OG Star Wars coin.

• Unexplained price spikes: Typically, a 5% increase in less than five minutes is an indicator of a pump.

• Who’s your daddy? Find out who has developed it. Do they have real names on social media? Legit profiles on LinkedIn? Who’s worked for them? If the details are vague, red flag.

• What’s the future? What is the token’s incentive structure? Has it promised unachievable returns? What’s the burn schedule? Compare these to known tokens such as BTC, ETH, SOL, and ADA to find out what’s missing.

• Look for the little things. Rug pull tokens have unsafe websites (read: http without security certificates) that have been created as an afterthought. There may be spelling mistakes. Things that you wouldn’t find usually.

It’s not the easiest but it’s not the hardest either. You just need to be smart about your money.

BlockFi: The Second Order Impact Has Begun

Crypto markets are spooked. The FTX-Binance deal fallout is having ripple effects on the entire industry. BlockFi, the crypto lender, said Friday it won’t be able to carry out business as usual. And it is also halting withdrawals.

Why, though?In July, BlockFi entered a deal with FTX US. It provided BlockFi with a $400 million credit facility. And gave FTX the option of buying BlockFi for up to $240 million, if certain performance conditions were met. Now FTX seems to have a $10 billion hole in its books. And clearly, the deal with BlockFi wouldn’t be on top of FTX’s owner Sam Bankman-Fried’s mind right now.

Why does it matter?This is not a good look for the crypto market, which is already in the red. And this could be just the tip of the iceberg. SBF’s business entities have investments in over 250 companies. The situation looks eerily similar to what happened after the Terra ecosystem collapse earlier this year. But this will probably be more brutal given the exposure FTX has in the crypto world. Just when things were looking slightly better. Sigh!

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