Gareth Johnson
Gareth Johnson
Updated on January 24, 2022

For many crypto enthusiasts, the decentralized nature of crypto coins is exactly what drew them in in the first place. However, decentralization can be a double-edged sword, as it makes the cryptocurrency environment subject to many malevolent ventures, from identity thefts to malware that aims to steal your funds.

One such example is the Bitconnect scam. Bitconnect was an exchange platform for lending and investing in Bitcoin (BTC) to purchase the platform’s open-source token, Bitconnect coin (BCC), launched in February 2016.

However, it turned out to be a combination of a Ponzi scheme and a pyramid scheme that caused great money losses to people around the globe. After the huge scam Bitconnect pulled, the term “bitconnected” entered into the crypto slang, meaning to be tricked by an obvious scam.

Obvious once they’ve been discovered, scams like Bitconnect can be more insidious and tricky to spot at first. Hopefully, after reading this article, you will have a better insight into how to be more cautious while investing your valuable assets in cryptocurrency.

What Is Bitconnect?

Bitconnect started as a platform that allowed investors to lend their digital assets in return for dividend payments, similar to earning interest on your deposit account in a bank. The catch was you had to convert your Bitcoin (BTC) to BitConnect Coin (BCC) and lock them on the Bitconnect lending platform to become eligible to gain the interest payment, which was around 1% a day.

3D gold coins forming BCC letters on dark blue background

Bitconnect claimed to have developed an artificial intelligence trading bot called the volatility software. The assets deposited in the Bitconnect lending platform would be bought and sold on the cryptocurrency market through this AI bot, extracting a significant profit. Consequently, the volatility software would calculate each investor’s contribution to the profit and, in turn, their daily earnings.

If you are an experienced and careful crypto investor, you would have quickly seen something fishy was going on. But cryptocurrencies are heavily technical virtual assets. Many people know how to buy and sell them but understanding the dynamics behind the blockchain is a hard row to hoe.

Since the beginning of Bitcoin, many people have made a surprising amount of profit out of it, while many others have lost fortunes. But the stories where people made thousands of dollars in a snap are more catchy. For this reason, a lot of people who wanted to make a quick profit turned their eyes to the cryptocurrency market. They were too blinded by the promised returns to suspect Bitconnect’s unexpectedly high returns were too good to be true.

What Is a Ponzi Scheme?

The Major characteristic of a Ponzi scheme is that it promises a high yield risk-free investment opportunity without sustainably investing the deposited money. Instead, a Ponzi scheme lures new investors to pay previous investors’ shares. Even if the whole operation looks like it could bring a good amount of money, the most straightforward financial analysis can show that it runs on loss that is getting larger as more investors join in. Thus, a Ponzi scheme is destined to dissolve, usually hurting the late joiners the most.

What Is a Pyramid Scheme?

A pyramid scheme is another form of unfair business model. In a pyramid scheme, top-level members recruit new members for a fee or service. Those members, in turn, recruit new ones. Each member profits from their recruited members and the members they’ve recruited, creating a pyramid-like structure where the money flows from the bottom to the top.

Businessman hand putting top card in pyramid cards on wood surface

The Fast Rise of Bitconnect

Bitconnect started its project on November 15, 2016, by releasing its initial coin offering (ICO). Its popularity started to rise at the beginning of 2017 when Bitconnect’s price was less than a dollar. It is worth noting that this was also the time when the first big spike in Bitcoin (BTC) prices occurred, which set the cryptocurrencies on a rising trend in general. By the end of the year, BCC’s price hit 463 USD – it’s all-time high.

Meanwhile, Bitconnect utilized a multi-level marketing structure, which created many influencer-like promoters across the internet. Because it had a referral program where the investors who brought in other investors were rewarded, some were very enthusiastic about promoting the platform on social media, and the spree snowballed.

Some experienced eyes, such as the Founder of Ethereum (ETH), Vitalik Buterin, and the founder of Litecoin (LTC), Charlie Lee, spotted Bitconnect’s fraud early on. Even though they warned people that the platform had been running a Ponzi scheme, the internet was too loud to hear them out.

Towards the end of 2017, the craze became severe. On October 28, 2017, the First Annual Bitconnect Ceremony was held in Pattaya, Thailand. Anyone who has invested more than 20,000 USD in the first two quarters of that year could join the ceremony.

A classical characteristic of Ponzi schemes and pyramid schemes is that early adopters usually make a profit out of proportion. Thus, the ones that happened to be involved in Bitconnect at the beginning of 2017 were able to generate lots of money.

The Fall of Bitconnect

Some say the extravagant ceremony drew even more attention to Bitconnect, including the legal authorities. On November 7, 2017, Bitconnect received a notice from the government of the UK saying how the platform wasn’t a legitimate business. Unsurprisingly, Bitconnect failed to prove its legality.

On January 3, 2018, the Texas State Securities Board also issued a warning letter to Bitconnect, pointing out the inconsistencies and the lack of transparency in operation. Following that, the States of Texas and North Carolina banned Bitconnect from financial activities within their borders.

Downward arrow on market trend on screen

The rising awareness in legal terms was the curtains for Bitconnect. On January 17, 2018, the Bitconnect lending platform was closed. With the escalating suspicions over its operations, the platform’s shutdown created a panic among Bitconnect Coin holders and led BCC prices to fall 92% overnight.

Bitconnect’s alleged owner was most likely a decoy, and there was nothing to prevent the platform from shifting names and continuing to pull the same scheme. Even though Bitconnect announced it would refund the loans, an ICO was initiated on Bitconnect X Coin (BCCX), exchanging BCCX in return for BCC.

On August 18, 2018, Bitconnect’s alleged India region leader, Divyesh Darji, who had a record of pulling a similar scam with a coin called Regal Coin (REC), was arrested in Delhi, India. In September 2021, Satish Kumbhani and Glen Arcaro were sued by the US Securities and Exchange Commission for defrauding US citizens out of $2 billion.

Are There Other Cryptocurrency Scams?

The invention of Bitcoin (BTC) took place barely over a decade ago. Several years may seem like a long time for our lifespans, but for paradigm-shifting innovations such as cryptocurrencies, a couple of years is not enough time to mature. The cryptocurrency market remains a fast-changing, indeterminate territory. In the same way that the Wild West was associated with lawlessness at the beginning of the expansion towards the American West, the cryptocurrency market is subject to similar attempts before the technology matures and becomes more regulated. As you can imagine, the history of cryptocurrencies is filled with scams, large and small. Here are some of the biggest cryptocurrency scams known to date.

OneCoin

Onecoin – not the same as Onecoin released by the Xunlei company in China) – is a Bulgarian-based cryptocurrency founded by Ruja Ignatova that turned out to be one of the biggest Ponzi schemes in the history of cryptocurrency.

The coin was offered by OneLife Network, which also sold educational materials on cryptocurrency investing and mining. Onecoin wasn’t sold on an exchange. Instead, in order to receive it, you had to buy the educational content that OneLife network marketed. Cashing it out was a problem because the coin wasn’t available on any of the exchanges.

USD bill sitting on top of fish hook with papers with financial graphs on background

It was said to be exchangeable on OneCoin’s exclusive exchange platform xcoinx, but in order to access the platform, you had to purchase an upgraded package. However, the problem was there was no blockchain base for such a coin, and even if you received Onecoin through purchasing the material OneLife Network marketed, it was practically useless. 

Bitclub Network

Bitclub Network claimed to sell shares of cryptocurrency mining pools and rewarded investors who recruited others in. Even though it is the textbook definition of a Ponzi scheme, many investors bought in. The network collected more than $700 million between 2014 and 2019 and then disappeared.

Quadriga

Quadriga was a Canadian exchange that was believed to be reliable. However, the founder was able to access all the private keys on the exchange and faked his own death upon siphoning $250 million. It was claimed that the founder had died on a trip to India, locking up all the wallet addresses on the exchange. Quadriga’s bankruptcy trustee Ernst & Young could recover only $46 million to pay out to clients. But the founder is thought to have pulled an escape scheme, leaving more than 70,000 victims behind.

Thodex

Thodex was a Turkey-based exchange that offered free DogeCoin (DOGE) upon the investment of crypto assets. Trading volumes in Thodex were reported to exceed billions of dollars before the founder pulled an exit scheme. The owner of the company vanished with $2.2 billion in April 2021.

A Few Words Before You Go…

As the crypto ecosystem continues to grow, it will undoubtedly remain a target for many more fraudsters. The best we can do is implement better regulations in the cryptocurrency market. However, the decentralized nature of cryptocurrencies prevents them from being subject to strict law. Moreover, this very nature of cryptocurrencies is what many of us love about them in the first place. So, the next best thing we can do to prevent scammers is to be better educated about the environment and live by the motto: If something looks too good to be true, it usually is.