While the world has been busy blaming regulatory crackdowns for the bloodbath in the cryptocurrency market, where the price of Bitcoin fell by over 40% within a month, a side-show-the shutting down of Bitconnect on Tuesday-should be of more interest to investors. There's a big lesson here for those looking to make a quick profit by snapping up digital currencies, Bitcoin, Ethereum, Litecoin et al, currently trading at a significant discount.
Bitconnect, a popular lending and exchange platform, which entered crypto street in December 2016, boasted a market cap of $2.11 billion at its peak on December 17, 2017. In fact, it was considered one of the year's best performing currencies on CoinMarketCap, a leading global index of digital currency prices. You can guess it its reach from the fact that the website was reportedly translated into several Asian languages, including Hindi.
The platform basically asked users to use their Bitcoins to buy BCC, which would then be lent out again to the BCC team with a lock-up of 2-6 months for a guaranteed daily return.
But three days ago, the platform suddenly announced that it will close down operations in five days, blaming "bad press", cease and desist orders from the securities regulatory bodies of Texas and North Carolina, and continuous hacker attacks for the move. In the bargain, the price of BitConnect Coin (BCC)-already reeling from broader selloffs in the crypto market since the beginning of the year-further tanked 87% in just one day post the announcement, from around $240 to $32. For all the hype and hoopla around it, it turned out to be nothing more than a Ponzi scheme.
"The requirement to hold BCC in order to participate in the program created an artificially inflated demand for the coin, resulting in a massive price surge," writes Smartkarma Insight Provider Rohit Varma in a recent report. He adds that Bitconnect deployed a four-tiered investment system that guaranteed a daily return of up to 0.25% based on the initial amount invested in the scheme. On an annualized basis, this amounts to roughly 90% risk-free return, and that's not including the potential additional returns of up to 40% by their mysterious proprietary 'volatility software and trading bot' that trades the Bitcoin exchanged for BCC. No logical insight has ever been provided as to how exactly the trading bot works and manages to make money on a magnitude sufficient to support its stated returns to investors.
In an attempt to aggressively expand Bitconnect's user base, the founders also used a multi-tiered referral system where users were rewarded up to 7% every time one of their referrals contributed BTC to the platform. "The source of funds for these outsized referral bonuses was not disclosed. One logical conclusion is that the team is using funds from the new users to pay off the referral bonuses and guaranteed daily interest for the earlier users. This business model is economically unsustainable and the catastrophic collapse of the project was predictable right from the outset," says Varma.
Despite these red flags, the platform was able to mobilise huge investments from the gullible public using snazzy promotional videos on social media channels. YouTube personality CryptoNick, who was big on promoting Bitconnect, became a popular scapegoat the last couple of days.
On Wednesday, the platform reportedly announced that it would refund all outstanding loans at a rate of $363.62, the average of the token's price over the past couple of weeks, but it did little to soothe irate investors. Its latest press release claims that "the current BCC price drop is the direct result of us releasing all of our members' coins at one time. We will do our best to honor the value of BCC as close to what it has been holding during past several months. At this time, we are closing the lending platform only. The BCC Exchange will work as usual from tomorrow and the wallet service will remain operational to hold your BCC on the website."
Bitconnect is also planning to launch a "new, superior system as an exchange that will support several cryptocurrencies as soon as possible" and claims that its Bitconnect X initial coin offering (ICO) is still active. "BitConnect Coin are limited in supply to 28 million and there are currently only 9.6 million in circulation. This scarcity of supply should create a market demand, with help and support from the community, once this new exchange begins operation. We still expect BitConnect coin (BCC) to gain its value back," added the release. This caused BCC price to suddenly jump up to over $82 yesterday but investors apparently have learnt their lesson-prices have dipped again in the past day.
The Bitconnect saga is worrying because it reportedly inspired several other platforms, including XRPConnect and EthConnect. A 2017 research paper by four academics at the University of Cagliari in Italy found a "a remarkably high number of Ponzi schemes" on the Ethereum blockchain-191 schemes collecting $418761 from 2304 distinct users before its second birthday. At that time, its market cap was just $8 billion. Since the total capitalization of the digital currency has now mushroomed to $101.95 billion, it stands to logic that the impact of Ponzi schemes has also increased proportionally.
Our finance ministry incidentally considers cryptocurrencies itself a Ponzi scheme. "Virtual currencies don't have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs... is entirely a matter of... speculation resulting in spurt and volatility in their prices," it said in a statement in December, adding that, "Consumers need to be extremely cautious so as to avoid getting trapped in such Ponzi schemes."
Given that the cryptocurrency market has been rocked by at least one big, bad apple every year over the past few years, it really isn't for the fainthearted. Last year, it was OneCoin-arrests were reportedly made in India too after several people invested close to ?70 lakh in the scheme-and before that, in 2015, Hong Kong-based bitcoin trading company MyCoin shut down suddenly and wiped out $387 million of investors' fortunes.