The investment landscape is full of opportunities; some will pay out and some won’t. While there are plenty of legitimate projects, whenever there is money to be made there will be people looking to cash in on at the other people’s expense. This is especially true in new and emerging industries, and the cryptosphere is no exception.
There have been several scam coins and Ponzi schemes in the short history of cryptocurrencies. This is due to a number of factors. First and foremost is the lack of governmental oversight. In traditional investment opportunities, there are regulatory bodies created to identify and deal with malicious actors looking to cash in and take advantage of uninformed investors. The Securities and Exchange Commission serves this purpose in the United States.
The lack of any government body ensuring accountability in the cryptosphere means that all responsibility is on the investor to properly investigate new projects in order to judge if they are above board. This has led to several high profile cases of crypto Ponzi schemes that have defrauded scores of investors for millions upon millions of dollars. We will examine a couple of the more infamous projects in this paper, but first, let’s look at a few early warning signs for scam coins that could potentially save a naive investor from having the wool pulled over their eyes.
What Are The Signs Of A Crypto Ponzi Scheme?
While there are a few different strategies that scammers have used to entice gullible and naïve investors to hand over their hard-earned dollars a hard-fast rule is “if it’s too good to be true…it is.”
Offers of low risk, high reward investments should always set alarm bells ringing. Scams often make claims that look great on paper, sometimes even the promise of “guaranteed ROIs” are tossed around, but unfortunately that just isn’t really how the financial world works. More often than not high risk equals high reward and low-risk investments get you low returns. Government bonds are low risk with low returns, while lottery tickets are high risk with high returns. Anyone telling you different warrants higher scrutiny.
Another theme that many of these schemes use is consistent returns, often times regardless of market conditions. This just doesn’t make any sense. There is no way that anyone can predict the future of any markets, let alone the highly volatile crypto market. To make promises that ROI will remain steady despite the natural variations inherent in speculative markets is a major red flag.
Other Signs To Look Out For
One thing that any legitimate project will have is a clearly defined explanation of the machinations of the token. A detailed and fully available white paper is standard across the industry with many projects using fully open-source code. Any project that obscures how their token operates, only offering vague promises of functionality, is hiding something and should be avoided. One of the cornerstones of the cryptosphere is transparency and the ability for users to thoroughly investigate new projects.
All legitimate projects should have clear and simple guidelines on how to divest from them and any push back or difficulty in selling out and claiming your cash is almost a sure sign that it is a scam. Unfortunately for most victims of these operations by the time this last red flag is noticed it’s too late to do anything about it. That’s why it is of the utmost importance to properly vet all potential investments and learn from the mistakes of those less scrupulous investors that came before us.
One more indication that a project is not what it appears to be is mention of “referrals” and “new contacts”. These are key words used in Multi-Level Marketing (MLM) scams, also known as Pyramid Schemes. These scams get investors to continuously recruit new members to join while never actually paying out ROI. The money moves back and forth between investors before it inevitably ends up in the pockets of the group perpetrating the grift. This is a model that has been around for ages and—unsurprisingly—has made its way into the cryptosphere.
Now that we have a better understanding of what scams look like and how to avoid them let’s examine two of the most infamous crypto Ponzi schemes in recent memory: BitConnect and OneCoin.
BitConnect: The Most Famous Scam
BitConnect was a cryptocurrency lending and trading platform launched in 2016 that seemed too good to be true from the get-go. That didn’t stop them from convincing people to dump all their money into it with promises of astronomical returns on investments. While it has since shut down operations it still serves as a useful lesson on the warning signs of a crypto ponzi scam. Let’s take a look at how all this worked.
In the BitConnect “ecosystem”, users would buy the BitConnect token, BCC, with either BitCoin or USD. These new users would then lend their newly minted BCC back to BitConnect with the understanding that these loans would accrue interest at staggering rates which would then be paid back to users.
These interest rates offered should have been a warning sign to prospective investors: promises of ROI of 1% per day were offered to investors. These rates were made possible by BitConnect's proprietary trading algorithm that supposedly analyzed patterns in crypto markets and was able to buy when prices dipped and then sell when prices pumped. Users only had to trade BTC for BCC and then lock it, sit back, and watch the money grow.
This would be some useful technology if it actually existed. In all videos and documents, there was never any solid explanation of how this trading bot functioned. In fact in one video when the time comes to explain this proprietary technology that allows for the entire ecosystem to function it is described simply as “Self Explanatory”.
More Warning Signs Appear
On top of all this suspicious organization, BitConnect also had a “referral” system that promised to increase users' ROI for the more new users they brought to the project. This ensured that there was a steady stream of new capital to keep the system alive while the people at the top collected their cash. This is a classic MLM scheme and should have set alarm bells ringing for anyone investigating the project.
And for many it did. Ethereum pioneer Vitalik Buterin called out BitConnect as soon as he saw their guaranteed returns: “Yeah, if 1% / day is what they offer then that’s a Ponzi.”
Not long after this proclamation from one of the most influential persons in the cryptosphere BitConnect was hit with a series of Cease and Desist Orders from regulators in Texas and North Carolina. This came shortly after BCC reached its market high of over $450 USD. BitConnect responded to these judicial orders by closing its exchange, making it impossible for anyone to withdraw their money.
As of January of last year, a number of class-action lawsuits have been filed by former investors against BitConnect. Facebook groups have also been created to target and sue every member of BitConnect as well as Youtube influencers who profited from their referral campaigns for the project.
While there is legal precedent for all nature of financial scams and Ponzi schemes, the court proceedings are often long and drawn out, with plaintiffs waiting years before they see any of their money returned, if at all. The fact that this is new judicial territory regarding cryptocurrencies and it could take even longer before we see a conclusion to the BitConnect story.
OneCoin: Another Crypto Pyramid Scheme
Another crypto project pyramid scheme that is worth examining is OneCoin. This was an MLM scam perpetrated by an international group but masterminded by Bulgarian brother and sister team, Ruja and Konstantin Ignatov. While key members of the scam have reportedly been arrested earlier this year, there are rumors circulating that the scam is still operating in some fashion. Through what appears to be sheer brazenness, the duo was able to create one of the most “successful” crypto scams in recent memory.
OneCoin is a project built around selling “cryptocurrency marketing packages” to customers ranging in price from 100 to 118,000 Euros apiece. According to OneCoin, these educational materials were the only product they sold despite the fact that each package comes with “tokens” that can then be “mined” to acquire OneCoin. There were also packages that involved “splits” which were able to allow users to double their money…somehow. The hucksters for OneCoin promise that with these “splits” a Tycoon Package bought for 5,000 euros can return 9,433 euros, even without OneCoin stock increasing at all.
OneCoin also has elements of an MLM: OneCoin offers a referral system eerily similar to a pyramid scheme in which recruiting new members is highly incentivized. OneCoin attempts to sidestep the pyramid scheme label by arguing that since their customers sign a contract stating they are Independent Marketing Associates (IMAs) they are private contractors and are not technically customers. They also insist that since these IMAs are incentivized, but not required, to recruit new members that it doesn’t fit the definition of an MLM.
These mental gymnastics have not fooled the governments of various nations, and OneCoin has gained the attention of legislators and law enforcement around the world. Over the course of almost 2 years OneCoin generated 3.4 billion euros in revenue, and according to prosecutors, had over 3 million members worldwide.
When Crypto Criminals Are Caught
Konstantin Ignatov, half of the brother/sister duo behind the scam, was arrested in May in Los Angeles on charges of conspiracy to commit wire fraud. His sister Ruja has been charged with wire fraud, securities fraud, and money laundering, though she remains at large. Mark S. Scott, formerly a partner of US law firm Locke Lord, was also arrested and charged with laundering more than $400 million USD for OneCoin, primarily through bank accounts in the Republic of Ireland and the Cayman Islands.
OneCoin has also come under fire from the Central Bank of Somoa, Bulgarian authorities, financial commissions in Belize, the Indian government, as well as Vietnamese authorities. Arrests have been made in China with an estimated $30 million USD seized. Millions of dollars have also been recovered from OneCoin bank accounts in India, while millions more were transferred before authorities could gain access to the funds.
OneCoin is a perfect example of what is possible with a good marketing team, confidence and an utter lack of empathy and morality. We are still watching this drama unfold, and with one of the masterminds behind the project still at large, it seems this won’t be the last we will hear of OneCoin.
Avoiding Crypto Ponzi Schemes
There will always be treacherous individuals in the world that work to take advantage of others and separate them from their hard-earned money. It seemed a natural progression for these scammers to find their way into the cryptosphere, with its lack of regulations, Wild West attitude, and perpetuation of “overnight millionaire” stories. With a seemingly endless flush of new projects emerging and its global reach, the cryptosphere and scammers are a match made in heaven.
This is what makes due diligence of the utmost importance when investing in crypto: there is only one person responsible for your money, and that is you. The OneCoin and BitConnect Ponzi schemes are an opportunity to examine scams and learn from others’ mistakes. In all of these pyramid schemes and MLMs there are always red flags—warning signs—that are there for those with the patience and forethought to take a closer look, and it is the responsibility of every investor to put in the time to ensure that they don’t get taken for a ride.
KuCoin's strict listing criteria help prevent such projects from listing on the Exchange
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