Bitconnect: Ponzi Scam or Great Investment Opportunity? [Token Investigations pt 41/50]

Bitconnect is a company that claims to offer stable investment returns of about 1% per day by matching bitcoin lenders with borrowers. It faces several credible allegations of being a ponzi scheme.

If I’ve learned anything after writing reviews of 40 different blockchains, it’s that you should stay neutral and do a lot of research. It often takes a lot of time and effort to cut through the layers of hype and misinformation that can obfuscate the truth about a project.

With Bitconnect, I had to be honest with myself from the beginning: While there is some “debate” on the issue, it seemed like a clear scam to me.

My reasoning on this was pretty simple. If some of the smartest and most reputable people in the blockchain space were calling Bitconnect a ponzi scheme, how could it not be? What incentive did Vtalik Buterin or Charlie Lee have to lie about this?

The Next Web points out a Vtalik Buterin tweet as well, which I can’t personally find, linking this YouTube video:

The video must be seen to be believed… it’s very. not. good.

Another Tweet, again originally found on The Next Web’s article:

With all of these first impressions weighing on my mind, I did not feel optimistic about Bitconnect. In spite of all that, I resolved to look into it and give it an honest chance before making my final judgement.

What is a Ponzi Scheme?

The most common phrase thrown at Bitconnect is “ponzi scheme”. We hear a lot of blockchain projects accused of this status, but I felt a little hazy on the definition.

A quick Google search turns up this definition: “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors”

For example, let’s imagine that John Doe starts LambosForEverybody Inc. He says that the business is thriving and anybody who invests $100 will receive $120 a week later.

Group A, 5 people, all are convinced to give him $100. John now has $500.

He convinces a second group, Group B, to do the same thing. Group B consists of 10 people. John earns $1000, plus the $500 he already has, bringing him to $1,500.

Now John can pay out Group A, costing him $600. That group is happy and they think the business is legitimate.

John has $900 left. he has to convince more people to join - maybe now at higher prices. Group C consists of 20 people each investing $500. John is up to $10,900 - and can easily pay $120 x 10 = $1,200 to pay off Group B.

This scheme keeps working - and John gets richer - as long as he keeps finding new people to join it. As soon as John can’t raise more money, the scheme breaks. For example - after John pays off Group B, now he has $9,700 left. By now he’s taken a vacation and bought a bunch of fancy cheeses and is down to $4,000.

He needs to find Group D so that he can pay off group C, whom he owes a collective $11,000.

What if John fails to find Group D? At best, he can only give $200 back to each person. When this happens, everybody in Group C loses $300 (assuming they get anything back at all) and the scam falls apart.

History shows that most of the time, the perpetrators of these kinds of schemes are able to get away with little or no punishment. And there will always be some people desperate/foolish enough to participate in these scams. That means it’s up to you to be vigilant and protect yourself.

Now that we have a clear picture of what a ponzi scam is, we have to ask: Is Bitconnect a ponzi scam?

To answer that question, we have to dig into the history of Bitconnect.

The History of Bitconnect

Most of the information about Bitconnect comes from Bitconnect or its users (like these, scammy looking, examples), making it hard to find unbiased info.

The attempted Wikipedia entry on Bitconnect was deleted for exactly this reason - the info all comes from the company itself.

Ethan Vanderbilt was the first person I found who could offer historical information on the venture.

Ethan points out that it is impossible to find any information on the people behind Bitconnect. The company was formed in a way that intentionally obscures the identities of the people responsible, and no public information exists. See this:

_source

Alongside Ethan’s page, Bitcoin Wiki points out that Bitconnect started out with the stated mission of “mak[ing] Bitcoin the main payment system in use by the world,” before switching soon thereafter to their current business model of interest-based lending.

The company’s roadmap ended in November 2017, so there is no indication of what comes next for the company. The entire roadmap between 2016 and 2017 was focused on fortifying the Bitconnect blockchain and adding debit card access to funds, which they apparently have done and I have to admit the website looks pretty slick.

Earning Money Through Bitconnect

Bitconnect’s major feature is that you can lend money through them and earn high interest rates. This involves buying Bitconnect coins and then voluntarily locking them up for a pre-determined amount of time, such as 100 days.

While the coins are locked up, they are (supposedly) lent out to others and you earn a portion of the interest. Here is Bitconnect’s chart to show off those rates:

You heard them right - low risk, 40% per month returns. Sound reasonable to you?

Of course, that is not reasonable. While cryptocurrency has given tremendous gains for many investors so far, 40% per month is an absurd number to guarantee…

In contrast, the U.S. stock market gains an average of 7% per year..

You can earn more than 7% annual while keeping it reasonably safe - for example, investing 5% of your assets into Bitcoin anytime in the last 5 years - or, The Balance gives the example of a certificate of deposit earning 17.2% in 1981.

The most famous and lucrative long-term investment fund of all time, the Medallion Fund, earned a bit more than 70% per year. This is considered to be the absolute all-time greatest, nobody else comes close.

Now remember that Bitconnect is claiming to offer 40%, monthly.

Is there much more to be said?

This raises all the usual red flags. For one thing, if the Bitconnect team really can reliably generate 40% monthly returns off of investments - why would they offer it to the world, rather than simply investing with their own money?

The Medallion Fund wasn’t just profitable, it was also private. The same is true of most of the top hedge fund managers - I’ve heard of funds that require a net worth of billions of dollars just to get on the waiting list.

Yet BitConnect offers what they claim is the greatest investment opportunity of all time - to anybody, regardless of capital.

If you compare the tone and detail behind a blockchain project like SALT - who offer a seemingly viable blockchain lending system - to Bitconnect, it’s night and day. SALT is a well-reasoned system where the inner workings are clearly laid out for all to see.

Bitconnect offers no explanation. They just claim to offer the most insane returns ever because, essentially, blockchain is magic.

Seems sketchy to me. But hey - I’m just one guy. You can do your own research and decide for yourself.

Market History

As is tradition in these Token Investigations, let’s take a look at the market history of Bitconnect. Just for fun:

_{source: coinmarketcap}

Up, up, up… But, since I think this token is a scam, I would never buy any of it.

Final Thoughts

I’m glad that I finally got to do some deeper research into Bitconnect.

Right now, it seems clear to me that the project is a scam. I came to this conclusion for a few main reasons:

(1) The returns are completely unrealistic - to an absurd degree, exponentially better than the greatest investment fund of all time to date.

(2) There is not nearly enough info on how these returns are generated.

(3) The tone of communication from Bitconnect seems very motivational/inspirational in a cult-leader kind of way. This matches the idea that it is a ponzi scheme. Particularly this video I linked up at the top.

(4) The history of the company is vague and the founders are anonymous.

(5) Did I mention how absurd the promised return rate is?

With that said, I’d like to throw it to you all - what do you think of Bitconnect?