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Initialize. Buy. Sell. – NFTs are more than that.
Split-second decisions come by more often than trading stocks or cryptocurrency. If you’re into volatility, there’s nothing that beats NFTs – careless traders can see their holdings plummet to near zero in a day. It is no wonder that Bill Gates described crypto and NFTs as “100% based on greater fool theory” as newbies take their agony onto Twitter.
I encourage you to look past that label. Scammers are everywhere, not just in NFTs and Web3. In Web2, they could be trying to sell you fake Apple products or branded bags and even investment plans that make no mathematical sense.
Ponzi or scams in the NFT space are known as rugpulls. And I’ve seen them come in all shapes and sizes in my time as a NFT trader and collector.
Post-mint, a project does not deliver what it promised pre-mint. Some projects may even be intentionally trying to overhype their project by spending a lot of resources on marketing such as paid influencer marketing or even “product placements.”
Other than profiting from a sell-out, a successful rugpull profits from a high volume of trades in terms of royalties. This typically happens during the initial bullrun before reveal and also during the panic sell phase – when people realize it is a rugpull and quickly let go of the project to cut losses as much as possible.
Case study: Pixelmon
Pixelmon pulled off one of the biggest rugpull in 2022 (as of this writing). With a starting Dutch Auction Price of 3 ETH (around US$8,000 at time of minting), the collection of 10,000 items sold out in hours. Many were bullish about Pixelmon, as holders of the NFT were promised great play to earn utility and even in-game land reservations when the game launches in 2023.
Furthermore, the renders of in-game playable characters which could be collected as NFTs looked promising. While many were hesitant to fork out such a large sum for a JPEG, seasoned NFT collectors and traders were sold by the incredible potential of this project.
With a substantial following of close to 200,000 and support from (then) huge projects such as Tasty Bones and Squiggles (which also turned out to be a rugpull), as well as the team claiming some had worked for big companies such as Warner Brothers and Disney, it is no wonder why some whale communities were justifying the steep mint price.
While the price dropped as the Dutch Auction proceeded, many collectors were still happy holding onto the NFT because of the great utility they were promised. Peace was inevitably destroyed in a chaotic fashion when each Pixelmon NFT was revealed.
Would you pay US$8,000 for these “beauties”? It became such a viral internet meme that people are still tweeting about it 4 months after the saga. The stark contrast between expectations and reality definitely caught believers off guard. In mere hours, its floor price plummeted to around 0.3 ETH (around US$800 then), leaving early buyers (assuming they minted at 3 ETH) with a 90% loss.
The fact that the project raised US$70 million at sell out and delivered such poor quality of work classifies it as a rugpull. Furthermore, wallet trackers also found out that 400 ETH (around US$1,066,000 at time of expenditure) raised by Pixelmon was quickly spent on other NFTs. When questioned, the team claimed they were “buying the dip.” This was not at all within the roadmap that was promised and we may say the funds raised were misused. This negatively impacted investor’s confidence.
At the time of writing, floor price sits at roughly 0.2 ETH (around US$230 as of time of writing) with little to no volume. I feel that their story of over-promising and severely under-delivering coupled with the misuse of funds may be a moment as major in NFT history as the creation of Cryptopunks (one of the first NFTs) – unfortunately in an infamous way instead.
What is a “soft rug”?
The project may have good intentions to deliver what they promised but due to failure to sell out, they may be left with a lack of funds to continue with their project. The project then soon goes dead and devalues over time as holders try to sell to cut their losses. Alternatively, a project can devalue over time despite a good sell out because the more practical holders do not see enough value to continue holding them. This is a practice of de-risking that many beginners (including me) fail to uphold as we are too blindly bullish at times – thinking our holdings can be the next 10X.
From experience, this is more common than most would realize or even admit. An example of a recent soft rug may arguably be Heartbreak Bear Version 2 (HBB V2). Because of the wary market conditions and the utility (or the lack thereof) of its Genesis collection, less than 1,000 items of its 6,089 V2 collection were sold during the minting window. Minting was slow as the floor price stayed close to the mint price. Coupled with low volume, it was obvious that a mint day sell-out was only a dream. As such, the team was unable to proceed with their planned upgrades to utility immediately. However, as the team is backed by a registered and recognised parent company in Singapore, they still have the means to continue working towards their promises – despite the disappointing floor prices. Till when? This remains a question unanswered.
However, for many other projects this scenario would usually be a death sentence.
Red flags: how to avoid rugs
Knowing what rugpulls are simply isn’t enough. One has to learn how to recognise them. But there are some tell-tale signs that you should look out for.
1. Credibility of project: doxxed or undoxxed?
Staying anonymous (undoxxed) gives one the power to speak their mind and act as they wish, possibly offending others – without taking full responsibility. While anonymity is allowed on many forums and social platforms to protect the reputation and identities of many, it should not be the case for the founding team of NFT collections.
Most NFT collections operate like a business, raising funds from the sale of JPEGs to give their community benefits – be it tangible or intangible. And businesses typically have their teams fully doxxed with their credentials clearly laid out to potential clients. While Web3 advocates decentralization, NFT projects often still have a team at their core, driving it and achieving the roadmaps they have previously laid out or that which the community has decided on (DAO-like with token holders as voters). I strongly feel that we should still know the identities of those whom we have invested in to ensure that they are accountable for the promises they have made (within their means) and do not suddenly disappear with our funds.
Hence, an undoxxed team would be a really big red flag to me as they should be proud founders (or contributors) of their project, to confidently accept all responsibilities. If you’re doubtful of how successful your project will be, why would any rational investor invest in you?
2. Quality of moderators/team
Entering a new server, I tend to look out for the frequencies of announcements. A team that is willing and consciously updating their potential investors on what is going on with the project is always a good sign. A good gauge would be one major announcement every three to five days – be it regarding progress, updates to roadmap, community events or even the planned doxxing timeline of the team.
Engagement level is a simple way to gauge the quality of community pre-mint. The lack of activities such as games and karaoke sessions may point to a team that does not truly care for their community. On the other hand, the lack of participation in these activities may also point to an inactive community that are unlikely to stay post-mint and are just in for a quick flip.
Community is a unique piece of intangible value. I can confidently tell anyone what my favorite project is till date – yet they will look at the floor price on OpenSea and question my sanity. Having a high percentage of ownership and whales in my local community, it holds value to me as they easily translate to my social connections and network in the local space. Above all, the founder and team remain very committed to their promises despite the bear market – rolling out merchandise to “feed the hungry whales”, scheduling more casual local meetups (despite already having three since April) and also planning the opening of a local NFT restaurant. The team constantly communicates with the community, dropping status updates regarding current plans and roadmap items. This has been done since pre-mint, showing how dedicated the team is to the project and how serious they are about achieving the goals set. Hence, from the interaction that the team has with the community, one can judge how well managed a team is.
3. Quality of users
We can start analyzing the quality of users by looking at the quality of conversation. I would personally avoid servers with users constantly spamming GM/GN/LFG or even short replies to others (when they could have taken more time to craft a better value-adding reply). It would seem to me these people are either bots or people looking to stay active and noticeable for a whitelist – and would phantom after they profit off flipping.
On the contrary, if users on the server are willing to give value-adding replies and even offer advice to beginners and share their alphas, I would be very bullish. In fact when I first started out, I was very grateful to those who were more experienced for taking care of me in the space. Some would even go the extra mile by having a private call with me to teach me a more cost efficient way of transferring ETH from a centralized exchange to my Metamask wallet.
In my opinion, the community is one of the most important factors that makes or breaks a project. Hence, the quality of users within a project would often determine if the project will moon, or flop.
4. Roadmap & potential for execution
As there is an oversaturation of NFT projects, cliché roadmaps tend to be less attractive to investors. Examples of cliché roadmaps include (but is not limited to) promised airdrops of future collections as well as free merchandise to holders. Hence, a more unique roadmap banking on the niche skills of the team would attract me to mint and hodl.
While creative and ambitious roadmaps can wow us, we must take into account the potentiality of successful execution. To assess potential execution, we can first evaluate the team’s background (which can often be found on the project’s server). If the team is predominantly from an IT background, it would not make sense if their project was art and merch oriented. Similarly, if the team primarily consists of creative and artistic talents, it would not make sense if their project is focused on delivering complex utility such as staking, liquidity pool and tokenomics. However, do keep a look out for their previous works published online. As mid-career switches as well as hobbies exist, one could potentially be working in the IT field but have a talent for the arts.
As much as we try to be cautious and perceptive of the projects we are about to mint, we as fallible humans may miss out certain red flags. Like how friends try to help each other with their homework, I encourage you to tap on other’s opinions and expertise before making the decision to mint. Ask around how others feel about the project and deduce their sentiments.
For example, If the majority are looking for a quick flip, do realize you either have to risk a quick flip with them or avoid minting the project entirely. As quality alpha groups are a hard search when one first starts out, here are two groups that I recommend.
Pros: Compilation of confirmed rugpulls and comprehensive details explaining legitimacy ranks and ratings of projects.
Cons: Rugpulls are often confirmed post-mint
2. NFT Debrief
Pros: Active members who will readily share their opinions with you.
Cons: Spammy. (Hence, I recommend muting the chat). Being founded and based in Singapore, you may experience a communication barrier especially if you’re not familiar with Singlish (local slang).
Even the most experienced ones in the NFT space have fallen (some still do fall) prey to rugs. Some even go so far as to claim that if you haven’t fallen for a rug, you are still considered new to the space. Rugs are probably going to stay around for some time, until regulation catches up with the crypto industry at least.
The points that have been mentioned above might seem “obvious” and anyone who is rational could have thought of it. However, people aren’t always rational as we are often fuelled by emotions when making decisions, especially when we are stressed, excited or even blinded by greed from the potential profits. Hence I urge you to give yourself time to think things through rationally to avoid making regretful financial decisions.
Stay safe, HODL, and WAGMI!