Squid Game (SQUID), the cryptocurrency token inspired by the Netflix hit, collapsed yesterday, leaving many investors with nothing. The meme coin launched on Oct. 26 and gained over 23,000,000% in a week, according to data from CoinMarketCap. It peaked at around $2,862 before falling to a fraction of a cent in a matter of minutes.
SQUID was supposed to be the utility token for a play-to-earn game. There were six Squid-Game-themed games on its website, which is no longer working. The token and site had no connections to the smash-hit Netflix show that features a dystopian game in which contestants can pay off their debts -- or literally die trying.
What is a rug pull?
A rug pull is a type of scam where a project's founders suddenly pull out, taking investors' money with them. In this case, the anonymous scammers made off with about $3.4 million of funds.
After pumping up the token's price on social media, the developers used a backdoor in the code to drain cash from a liquidity pool. A liquidity pool is something a decentralized exchange (DEX) uses to ensure customers can trade.
Without getting too technical, a centralized platform acts as the middleman and manages your trade using an order book. In contrast, a DEX uses a liquidity pool. As the name suggests, it's a pool that contains pairs of tokens. Investors are incentivized to provide liquidity by committing tokens to the pool in exchange for rewards. Traders then buy and sell from the pool, and the liquidity providers often receive a percentage of the fee.
How to avoid being scammed
We're in a crypto trading frenzy and it's all too easy to get caught up in the hype. We see the price of certain meme coins jump hundreds or thousands of percent, even though there's nothing substantial behind them. Regret over not buying the latest coin to produce huge returns drives people to buy another coin that might be the next big thing.
Here's where SQUID checked a lot of boxes. The extraordinary growth of Axie Infinity (AXS) has meant investors are hungry for play-to-earn games. And Netflix recently said its Squid Game show is its most popular ever.
But there were also some warning signs, which are key to know if you want to avoid falling prey to future rug pulls. Here are some red flags to watch out for:
- Its white paper and website were full of errors. If there are typos in the promotional materials, alarm bells should start ringing.
- The founders were anonymous. This made it easy for them to disappear with investors' money.
- It wasn't available from major cryptocurrency exchanges. With over 13,000 coins on the market, big exchanges only list a fraction of the available coins. But think carefully if you find you can only trade a coin on one decentralized exchange.
- Twitter restricted the SQUID account for "unusual activity." This probably happened too late for most investors, but even before Twitter stepped in, people couldn't reply to posts on SQUID's feed.
- Most significantly, investors couldn't sell the coin. Various reports say it was possible to buy -- but not sell -- SQUID, which is the clearest signal to stay away. There's no point owning a coin that's worth a fortune if you can't sell it.
Nobody wants to fall victim to a rug pull, so if a coin is promising extreme rewards, look for the danger signs before you trade.
Research is crucial
All cryptocurrencies carry risk simply because there's so much we don't know about how this industry will develop. It's still relatively new and unregulated, which is why it's advisable to only invest money you can afford to lose.
But research is an important tool. Look at the people behind the cryptocurrency. What experience do they have? What other projects have they been involved in? Read the crypto's whitepaper to understand what problem it plans to solve and how it will do it. Think about how many people the crypto might reach and what real-world value it has. It's also good to look on sites like Token Sniffer or Coinopsy to see if the coin is flagged there.
Most of all, try not to see crypto as a get-rich-quick scheme. Invest for the long term and think about projects that have real staying power. You might not see eye-watering rewards, but you're also less likely to lose all your money.
Cryptocurrency is the Wild West of investing. There are some protections against scams, but -- unlike the stock market -- there's little to stop those behind new coins from lying and manipulating the market. Unfortunately, the onus is on us as investors to delve deep into crypto projects before we part with a dime.
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Emma Newbery has no position in any of the cryptocurrencies mentioned.
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