The invention of cryptocurrency was definitely positive; it has sparked massive innovation and helped millions reach financial independence. Unfortunately, the unregulated, hyper-competitive nature of the cryptocurrency markets means that it can also be a space for scammers and criminals looking to cheat people out of their hard-earned money. BitConnect was the latest big scam and defrauded investors of millions of dollars. It was a large-scale crypto Ponzi scheme that finally shut down its main services on January 16 in the face of regulatory pressure and community scrutiny.
BitConnect is a British company that first emerged with an initial coin offering (ICO) for its BitConnect Coin (BCC) in November 2016. BitConnect’s main characteristic was a lending platform that promised annual returns of over 400%. BitConnect advertised to individuals and solicited Bitcoin (BTC) in exchange for BCC. It then claimed that BCC would be lent to others and accrue daily interest earned from a proprietary trading bot. BitConnect also offered an exchange platform for trading BCC. The company grew rapidly in part due to a multilevel affiliate referral system designed to recruit new depositors.
Soon, many in the crypto community alerted people to BitConnect’s shady features, including an absence of information on its creators and lack of a white paper. Prominent community leaders including Litecoin’s (LTC) creator Charlie Lee and Ethereum’s (ETH) creator Vitalik Buterin cautioned that BCC was a classic Ponzi scheme that used new investors’ funds to pay older investors. Yet people continued to send BitConnect money. BCC hit a record market capitalization of $2.6 billion and all-time high price of $476 in December before collapsing to the $6 to $80 range during the last correction.
In January, Texas and North Carolina regulators issued cease-and-desist letters to BitConnect, warning that it was not authorized to sell securities in those states. In a statement that announced the immediate closing of its lending platform and the closing of its exchange later this week, BitConnect blamed regulatory concerns, dedicated denial-of-service attacks, and bad press. However, the company asserted that it is still working on its upcoming ICO of BitConnect X (BCCX), a token similar to BCC, and a new exchange platform. BitConnect stated that it would refund BCC to individuals who had deposited into the lending platform. The problem is that as people tried to cash out and stop losses, they realized that their nearly worthless BCC had lost over 90% of its price and that the exchange suffered from technical issues preventing trade for BTC.
Unfortunately, defrauded investors have little recourse to recover their lost funds. Many defrauded investors are working class people in the US and Southeast Asia who deposited their savings with BitConnect upon referral by friends or family members. Since BitConnect is a shady company with hidden ownership, it is unclear who defrauded investors can sue to receive compensation. Also, BCC social media promoters like Glen Arcano, Craig Grant, CryptoNick, and Trevon James have distanced themselves from BitConnect for fear of reprisal. A class-action lawsuit is under consideration, but lawsuits and judgments will take time.
Many people have used memes and parodies to make fun of investors who lost their money to BitConnect. In hindsight it is clear that BitConnect was a Ponzi, but investors who deposited last year did not have perfect information. However, it would be better if the crypto community offers defrauded investors legal, financial, and emotional support. Going forward, newcomers should learn to be skeptical of high-yield investment schemes like BCC and BCCX and heed warnings from community leaders. In return, the community should support defrauded investors, so they understand that BitConnect and crypto are not synonymous—and that many wonderful, promising, and honest crypto projects exist.
The author holds a long position in BTC.