There’s a lot of conversation surrounding cryptocurrencies and Bitcoin these days. El Salvador just adopted it as legal tender. Bitcoin breached the $50,000 mark for the first time since May. And an infamous crypto scam dubbed the Bitconnect fiasco may finally be coming to a close.
We are going to talk about that last bit in today’s Finshots.
The Story
Bitconnect (not to be confused with Bitcoin) started off with a simple promise. They introduced a new cryptocurrency in an attempt to revolutionize the industry. They called it the “Bitconnect Coin” and nudged people to invest in these new assets using USDs or Bitcoin.
However, this new variant had an ace up its sleeve. Unlike other cryptocurrencies (where you usually make money as the price moves over time), with Bitconnect, you could also lend your coins in exchange for a neat interest income. The platform promised to take your coins and invest them using a “volatility software.”
What’s this volatility software you ask?
Well, nobody knows. Theoretically, it would mean making money off of large price swings. If the price of a commodity were to move wildly in any direction, you could bet on it and cash in on the “volatility” so to speak. But with Bitconnect, nobody could tell for certain what this software did or how it worked. It was just something that the promoters kept talking about and everybody sort of went along with it.
Especially considering the reward on offer.
Bitconnect had a four-tier investment system. The more you invested the better returns you could reap. By putting up anywhere between $10,000 to $100,000, you could make upwards of 40% a month + 0.25% daily.
What’s more — “You could even get your capital back in under 120 days if you were investing a lot of money.”
Which kind of goes against the fundamental principle of money management. It’s harder to extract a higher sum of return over a short period of time if you were dealing with large sums of money. Obviously, that’s not to say that such a scheme is impossible to pull off. It’s just that it would entail a lot of risks — risks that hardly ever featured in Bitconnect’s promo material.
And it didn’t stop at that. Bitconnect promised even higher rewards if you marketed the scheme to your fellow friends and family. You could earn a referral bonus alongside the investment income and you could become a millionaire if you really gave it everything.
And at this point, I am hoping the contours of the scheme are more apparent. Bitconnect was promising the moon, the sun, and the solar system without ever divulging any real details. And they were doing it even as many people publicly questioned their claims. Bottom line — Bitconnect wasn’t revolutionizing anything. It was by all accounts a Ponzi scheme and here’s how it worked.
If you wanted to make money off of this scheme, you had to first buy Bitconnect coins (using Bitcoin or USD) and then wait for your money to compound. The interest income and the principal however would only be paid in Bitconnect coins — which is kind of the catch here. Even if your investment was due, you had to take your Bitconnect coins and convert them back to Bitcoin or USD.
At first, this wasn’t much of a problem since everybody wanted in on the scheme. The value of Bitconnect coins was exploding and you could easily exchange them for something more meaningful. In fact, the scheme worked perfectly until everyone believed Bitconnect coins were worth something. But when that collective faith dropped, everything changed.
Which is kind of what happened when authorities began sending cease and desist letters to the company. Regulators had finally caught up with the company and the scheme wasn’t going to last for long. In fact, as soon as people began finding out that there was no “volatility software” the value of Bitconnect coins plummeted. And those still holding these dud assets hoping their investment would be repaid in full were left in a lurch. They simply couldn’t redeem it for anything worthwhile.
Soon enough the company went bust and 3 years on since the debacle, US regulators are now finally charging Bitconnect founders Satish Kumbhani and promoter Glenn Arcaro with wire fraud.
So yeah, while cryptocurrencies may definitely hold potential, don’t forget that there’s always someone promoting a “get-rich-quick-scheme” in a bid to swindle you off your hard-earned money.
Until then…
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