BitConnect — Anatomy of a Scam

Before reading this article please read our disclaimer at the bottom of the article or here.

Everything Wrong about Crypto in one Package

Introduction

Last week’s Tuesday January 16th we experienced one of the largest crashes in the cryptocurrency world in recent history, dozens of billions of dollars off the cryptocurrency market cap were lost as prices kept falling. Welcome to cryptocurrencies.

This year’s bubble was caused by two main factors, one was the news that South Korea might regulate the purchase and sale of cryptocurrencies. The South Korean government quickly commented on the situation by stating that users will be allowed to trade, but only if it’s not anonymous.

Something much more sinister also caused the collapse. An Indonesian Company — BitConnect ceased to operate and revealed that it is most likely a ponzi scheme. Thousands of people lost everything.

So what is BitConnect, why did people trust it in the first place, and what caused them to close their doors?

Image Caption: The image we woke up to, Tuesday January 16th via Crypto Market Cap for Android.

History

BitConnect is a company, an exchange, and an open-source Bitcoin-based Cryptocurrency. It was launched in February 2016 and became one of the most successful cryptocurrencies by price up until the very beginning of 2018, with an all-time high of $463 per token last month (currently at about $12), and a market cap of about $2.7B USD.

The company became quite infamous last month when a Youtube video of their Thailand conference appeared displaying extremely weird behaviors from guest speaker Carlos Matos. After the Exchange’s collapse, the video has been picked by multiple other Youtubers.

How it works

A user trades Bitcoin in exchange for BitConnect Tokens through their exchange, which provides the user daily profits in the form of dividends. The profit percentage depends on how many other people the user invites to join BitConnect, and how many tokens the user owns. The company claims that it is possible to make roughly 1% of the initial investment every day, or about 3,780% profit per year.

Furthermore, they claim that the profit is generated through an investment algorithm that they have created. The algorithm invests in Bitcoin when its low and sells when its high. What’s extremely strange is that the company does not provide any details about this algorithm such as how it works, the variables it looks for, or even how it would make predictions as the investment pool keeps growing.

This practice became a huge concern for the community since the pool of BitConnect money reached almost a $3B market cap, and having an algorithm that is trading that much volume would effectively cause investment slippage. Which means that as you buy and sell larger volumes, your act of purchasing and selling affects the price of the asset itself, as you represent larger and larger percentages of total trades. The company would also share the profits in US dollars instead of Bitcoin, which caused further criticisms.

To make matters worse, BitConnect uses a “Referral Bonus” system which was heavily advertised by multiple YouTube crypto personalities that are now facing legal charges for their recommendations. The YouTubers would get higher and higher investment profits for referring more people. In fact, the BitConnect platform was built to recruit others and give the user higher rewards for referring others to join the network.

Caption: BitConnect News website.

Shortly after reaching their all-time high price, the company received cease and desists from security regulators in Texas and North Carolina. As a response, the company decided to shutdown the exchange, which made it impossible for people to withdraw money from their exchange and crashed the price of the cryptocurrency, which could then only be traded in 4 other exchanges as BCC.

Image from BitConnect’s website

ICOs

In order for an ICO (or any company), to be successful long term, the company should describe investors their plan as transparently and logically as possible. A company looking to last a long time and make their investors wealthy, will try to do so over a long period of time, instead of trying to make money as fast as possible.

In order to achieve that goal, the founders have to make sure that their cryptocurrency is well thought out. This means they understand why they are using a cryptocurrency, and are also be able to communicate it to investors and their team. This is to make sure that your investors understand what they are investing in, and also to enable them to understand what you do.

Some of the elements that you need for a successful ICO include:

• A complete White Paper
• Transparent Business Model
• Description of goods and services
• Good Community Management
• Bounties or good software practices measured by a third party
• No Profit Promises or Guarantees
• Giving full Access to the tokens to your customers
• Location and registration
• Use of funds
• Traction and legal documentation, such as incorporation and shareholder’s agreements

BitConnect had none of these, and their website heavily heavily obscured information surrounding how their product works and what it does. In order to avoid people asking questions. The biggest question for users is how do they make money in the first place from lending? Their YouTube video is so dodgy about this, the only thing they say about it is that “Trading and Lending are self explanatory”.

The reason this is troubling is that unless we understand the terms and conditions of this “Trading and Lending” it is very difficult to approximate whether or not is a good idea, or even if it makes sense for it to be consistently profitable as it scales.

Image Caption: From the BitConnect “What is BitConnect?” video on their website.

Ponzi Scheme

A Ponzi Scheme is defined as

“… an investment fraud where clients are promised a large profit at little to no risk. Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments. This new income is used to pay original investors their returns, marked as a profit from a legitimate transaction. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart” - From Investopedia’s Ponzi Scheme

Ponzi Schemes have the following properties

1. A guaranteed promise of high returns with little risk
2. Consistent flow of returns regardless of market conditions
3. Investments that have not been registered with the Securities and Exchange Commission (SEC)
4. Investment strategies that are a secret or described as too complex
5. Clients not allowed to view official paperwork for their investment
6. Clients facing difficulties removing their money

Not only did BitConnect follow all the items in the list, it did this at a scale and speed unheard of by most Ponzi schemes.

Class Action Lawsuit

As of today, January 25th, 2018, multiple class action lawsuits are being prepared against BitConnect. Facebook groups with thousands of members have also been created to personally target and sue every member of BitConnect, as well as the celebrity promoters that recommended and mentioned the cryptocurrency to the public.

Conclusion

Image caption: Image from BitConects YouTube Channel found here

The terrible reality about cryptocurrencies is that the market is currently extremely volatile, not only in its price, but also in a massive lack of regulations and answers from the securities commissions of multiple countries, as well as fuzzy taxation regulations.

To make things worse, the cryptocurrency craze has caused multiple people to make millions while others lose everything. However, the people who became rich have larger audiences than the thousands of people that didn’t make money on cryptocurrencies, which does not help with perception. Tokens like BitConnect that incentivize others to tell their friends to join, only make the problem bigger, and they are everything that is currently wrong about the ICO space.

The next steps

The story is not over, 2 weeks ago, the creators of BitConnect launched a new currency by the name of BitConnectx, and are going through an ICO. The self described token does the following:

“BitConnect X (BCCX) is an open source, blockchain based, decentralized cryptocurrency that enables instant payments to anyone with minimum transaction fees.” - Based on Bitconnextx website.

The website also mentions it will enable users to trade cryptocurrencies as an exchange. Again they provide almost no information, not white paper, they do not explain how they differ from numerous Blockchain “instant” payment methods, and of course, they have a dark history already.

If something promises incredible rewards, with very low risk, and does not make any effort to explain how it works, or why it works, a user should be extremely suspicious. The fact that multiple people were giving BitConnect money allowed them to profit while increasing their network of influence. To make things worse it seems like they have not learned their lesson.

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Image Caption: Spelling mistake from the first 5 seconds of the BitConnect explanation video