It’s seems odd, amid the swirling techno-mysticism and futurism of cryptocurrency, to hear the phrase ‘Ponzi scheme’ being uttered.
That’s old money, right? Charles Ponzi was a hardscrabble conman way back in the American roaring 20s, after all. But turns out Mr Ponzi’s scheme has more widespread applicability than even he knew.
BitConnect, one the largest bitcoin exchanges (that is, a marketplace), has shut down after numerous allegations of it being a Ponzi scheme. Basically, a Ponzi scheme is a scam where a con artist pays old investors a return generated by the money from new investments.
Despite being named after Charles Ponzi, the scam’s most famous applicant is Bernie Madoff. The scheme works well when it’s constantly being infused with new investment, but when flow stops -- perhaps due to a historic financial crash, as in Madoff’s case -- the scheme falls apart.
BitConnect’s closure seems to conform to this trajectory. The anonymously run exchange focused heavily on customer acquisition. It incentivised investors to promote it in a multi-level marketing structure with an uncanny resemblance to HerbaLife.
Many critics had attacked BitConnect in the past, but its business model was able to withstand any criticism thanks to the historically high prices during the Bitcoin mania that struck late last year.
January has seen a sudden market downturn, however: Bitcoins lost about 40% of their value over the past six weeks. As the American economist Paul Krugman observed, “if bitcoin were an actual currency, that would be the equivalent of a roughly 8,000% annual inflation rate”.
These losses meant BitConnect’s model could no longer sustain itself -- à la the classic Ponzi scheme. The anonymous founder (or founders) behind BitConnect remain defiant though, blaming bad press, cyber-attacks and regulators for the closure.
The excuses will mean little to the investors who have lost their money. To BitConnect’s many long-time critics, it’s yet another harsh reminder that despite its virtual properties, the crypto landscape is as populated by hucksters and charlatans as traditional finance.
If it sounds too good to be true, well, it probably is, Nicholas Gregory, the founder of CommerceBlock, told AccountingWEB. “[Schemes like BitConnect] are no different than someone knocking on your door selling timeshares, there’s no free meal. But people are attracted to that. They’re no better than timeshares or penny stocks.”
The safest inlet into bitcoin, Gregory said, is through the community. “Join the community and spend time understanding it,” he advised. ”There’s no such thing as a free meal.”