Bitcoin Ponzi Scheme: New Coin, Old Scam?

AMA2-10-15The Bitcoin is looking more and more like traditional money every day. In just a few short years, the upstart digital currency has gone from a mere novelty to a multimillion dollar trading commodity subject to many of the ills that plague “real” money backed by national and international banks. The latest step: a massive “Ponzi” scheme that bilked millions from Hong Kong Bitcoin investors.

Created in 2008, Bitcoin went public with its first transaction in 2009. Touted as the first completely democratic, decentralized form of currency, the digital coin was welcomed as a way for anybody to conduct transactions anywhere in the world in private and independent of the regulations and control of traditional banking.

In the years since that first Bitcoin transaction, the cybercurrency has had a dizzying run that saw it accepted for transactions involving things like in vitro fertilization, luxury cars, travel, college tuition, real estate – and drug dealing. Bitcoin even entered the international currency markets, trading for prices reaching as high as $200 against established currencies including the dollar, euro and yen.

Established banks in the US and abroad took a wary view of the Bitcoin, with state bank in some countries refusing to deal with it – and others declaring it an outright threat. But still the Bitcoin continued to flourish, thanks to private Bitcoin exchanges that sprang up around the world, primarily in Asia.

The Bitcoin suffered a massive wave of bad publicity that in some ways validated the claims of its worst critics when in 2014 the digital coin was implicated in the takedown of the huge online drug marketplace Silk Road. Run by the notorious Dread Pirate Robert, the site was meeting place of buyers and sellers of all kinds of illegal goods and services – and to no one’s surprise, the virtually anonymous Bitcoin.

The FBI and international authorities shut down Silk Road and confiscated its stash of Bitcoin, to be later distributed among the agencies involved in the operation. Bitcoin survived – but so did its reputation as a tool for illegal activity and money laundering.

Bitcoin transactions take place with the help of Bitcpon exchanges, online sites where users can exchange hard currency for coins and vice versa. The most prominent of these, Mt Gox, failed spectacularly in 2014, amid reports it had lost nearly 745,000 BTC (Bitcoin), which at the time was worth about $400 million. Since then, several other independently operated exchanges have sprung up, including Bitstamp and Bitfinex.

The Mt Gox incident was the best-known case in which a Bitcoin exchange folded, taking masses of money with it. But Mt Gox wasn’t directly implicated in fraud. Now, though, the Hong Kong based exchange MyCoin, is – as the world’s newest coinage becomes implicated in a type of fraud that’s nearly a century old – the Ponzi scheme.

Like Mt Gox, MyCoin closed down abruptly in the early day of February 2015. The online exchange completely disappeared – taking an estimated $386 million USD in client investments with it. And events leading up to that vanishing act strongly suggest an updated version of the venerable Ponzi scheme.

The Ponzi scheme, named for Carlo Pnnzi, a con man who perfected it back in 1920, is an investment scam that makes its money not from investing clients’ money in profitable investments, but from bringing in more new investors. Eventually the scheme collapses without a constant stream of new participants.

That seems to be what happened with MyCoin. Investors told local authorities that not log before it vanished, the company changed its trading rules, forbidding investors from exchanging all their Bitcoins unless they brought in new investors.

Cases like MyCoin, Mt Gox and Silk Road point up the fact that, by its very nature, Bitcoin is a largely unregulated – and unregualtable – currency. But those highly publicized struggles also serve as a reminder that in just a few short years, the digital coin has made significant inroads into the world’s financial structure.

As investors keeping a close eye on the fate of the dollar and other “traditional” currencies are realizing, the Bitcoin is here to stay – and it’s a force to be reckoned with. (Top image: Flickr/BTCkeychain)


Baipal, Prableen, “ A Look At the Most Popular Bitcoin Exchanges.” Investopedia. 19 Nov 2014

Kelleher, John. “Bitcoin Mass Hysteria: The Disaster That Brought Down Mt Gox.” Investopedia. 2 Sept 2014

Rosenfield, Everett. “$386M Allegedly Missing, As Investors Fear Bitcoin Ponzi.” CNBC Investing. 9 Feb 2015.

Read more from The American Monetary Association:

Swiss Franc Fallout Ripples Round the World

Can a Strong Dollar Stifle Profits?

The American Monetary Association Team


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