Rug pulls and honeypot tokens
How developers can disappear with investors' money in a rug pull, how honeypot tokens stop you from selling, and the warning signs to check.
Anyone can create a new token on a blockchain in minutes, often for a small fee. Most new tokens never become valuable, and some are designed from day one to take buyers' money. Two common designs are rug pulls and honeypots.
Rug pulls
The name comes from "pulling the rug out from under someone". In a rug pull, the creators launch a token and attract buyers with hype, then take the money and disappear.
On decentralized exchanges, trading works through a liquidity pool: a pot holding the new token and a well-known coin such as ETH or a stablecoin. Buyers swap into the token, putting their ETH into the pool. In a common rug pull, the creators remove the pool's valuable side. The token can no longer be sold for anything meaningful, and its price falls close to zero.
A new token launches with a pool of 10 ETH and a slick website. Over three days, buyers swap in another 90 ETH. The developers then withdraw all the liquidity, about 100 ETH worth, and delete the website and social accounts. Holders still see the tokens in their wallets, but no one will buy them.
Other forms include developers selling a huge hidden supply all at once, or a project that collects money for a product and simply stops working on it.
Honeypot tokens
A honeypot token is built so that you can buy but cannot sell. The smart contract contains hidden rules: only certain wallets may sell, or a sell tax of nearly 100% applies. The chart often looks great, because nobody can sell and push the price down. That is part of the trap.
A chart that only goes up with no sell-offs at all is not a sign of strength. It can mean that ordinary holders are unable to sell.
Warning signs
- Anonymous team with no track record, combined with heavy hype.
- Liquidity not locked, so the creators can remove it at any time.
- Few wallets hold most of the supply.
- Contract can be changed by the owner, for example to pause trading, raise taxes or mint new tokens.
- Very high buy or sell taxes, or no visible sell transactions from ordinary wallets.
- Pressure to buy fast before a "launch", "listing" or "presale ends".
A simple beginner rule
As a beginner, you do not need to trade brand-new tokens at all. Checking smart contracts takes skill, and even locked liquidity and audits do not guarantee safety. If you choose to experiment anyway, use only an amount you would be fine losing completely, and assume you may not be able to sell.
A free account tracks lessons, unlocks the quizzes and gives you 10,000 virtual USD (no real value) to practise with.