Lessons Learned From the BitConnect.co Debacle

During its brief existence, BitConnect was an open-source cryptocurrency Ponzi scheme that some estimates suggest cost its customers around $1 billion in losses.   At its peak, it had a market cap of more than USD $2.6 billion and each BitConnect Coin (abbreviated as BCC) was valued at more than $400.  Yet, as quickly as BitConnect entered the cryptocurrency market, it left in an explosive scandal.

How did it work?

 

BitConnect emerged in the cryptocurrency market in December 2016 as a Bitcoin investment lending platform.  A surge of investors bought into both the company.  Yet, as the BitConnect user base grew, so did concern about its business model.   

Many seasoned investors were wary of BitConnect and warned that it seemed like a Ponzi scheme.  Indeed, the company followed a four-tier investment system that promised big returns depending on how fast and large their cash investments were. BitConnect promised an up to 40 percent total return every month, and a one percent rate of return every day. 

BitConnect claimed to generate the profit necessary to sustain these returns through a proprietary algorithm that traded Bitcoin, another cryptocurrency, essentially buying Bitcoin low and selling it high.

While some investors expressed concern that this business model was unsustainable, BitConnect was busy hiring a large number of affiliate marketers to attract more investors. Those investors, in turn, would be rewarded for enlisting a new round of investors. 

Hundreds of investors continued to buy into the BitConnect model, as the company’s marketing became more aggressive–and outlandish.

Carlos Mantos

 

During the Oct 2017 BitConnect Annual Ceremony, in which the company rallied investors and hoped to attract new ones, Carlos Matos, supposedly an “everyman” investor, gave an enthusiastic speech in support of the company.  He even mentioned that his wife thought BitConnect was a scam in his speech, but that he reassured her he was raking in large profits. 

Since the fall of BitConnect, Matos’ already infamous speech has become even more of a joke to the public.  Matos has been turned into scores of internet memes and became the face of the company’s collapse, despite having an unclear role in its existence.  To many people, he represents the volatility of the company and its turbulent nature.

 

The Fall of BitConnect

 

As the BitConnect scheme grew in size, it attracted the attention of authorities.  On November 7, 2017, the government of the United Kingdom issued a declaration to BitConnect, demanding it prove its legitimacy within two months.  On January 4th, 2018, the Texas State Securities Board sent BitConnect a cease and desist letter.   Additionally, on January 9th, the North Carolina Secretary of State Securities Division issued a temporary cease and desist order

 

Following these regulatory actions BitConnect shut down on January 17, 2018, and its value crashed by 92%.  A restraining order was temporarily placed on its assets in late January 2018, and Divyesh Darji, the India region leader, was arrested in August 2018. 

 

BitConnect’s extremely high payouts and multi-level marketing structure contributed to its lack of sustainability.  Worth USD $463 at its peak in December 2017, the cryptocurrency crashed to USD $5.92 by the end of January 2018.  Because of this, its payments on outstanding loans were worthless.  

 

As the fall continued, it was revealed that BitConnect lied about how it operated, its headquarters location, and the names of its founders. The legal problems mounted.

Legal Issues

 

In October 2018, Coindesk reported that several lawsuits against BitConnect had been combined into one.  The new Amended Consolidated Class Action Complaint produced in the U.S. District Court for the Southern District of Florida names a number of promoters and owners of BitConnect as responsible parties in the fraudulent company.  These named individuals and entities include BitConnect Public Limited, BitConnect International PLC, BitConnect Ltd, BitConnect Trading Ltd, Divyesh Darji, promoter Trevon James, and nearly 40 other people involved in its operation.  The lawsuit cites 22 legal violations and seeks to acquire compensation for the investors. 

In February 2019, the US Federal Bureau of Investigations (FBI) began trying to find people hurt by the BitConnect scam.  They have asked victims to submit their information in a questionnaire.

Lessons Learned 

BitConnect offers a cautionary tale to investors seeking to get involved in the cryptocurrency market.  Multi-level marketing companies with impossibly high returns should be researched thoroughly. 

 

The US Securities and Exchange Commission suggests that investors consider the following characteristics as warning signs of a Ponzi Scheme:

  • High investment returns with little or no risk
  • Overly consistent returns
  • Unregistered investments
  • Unlicensed sellers
  • Secretive and/or complex strategies
  • Issues with paperwork
  • Difficulty receiving payments

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