Cryptocurrencies have entirely transformed the way people view financial transactions. But over the past decade, the meteoric rise of this asset class has also resulted in enormous crypto scams. While the brightest minds have developed revolutionary businesses powered by cryptocurrencies and blockchain, nefarious individuals have also jumped on board, defrauding unwitting investors in sophisticated scams.
One Coin, Bitconnect, Thodex, and Bitclub Network are a few of the largest crypto scams in recorded history. Most of the biggest heists shared the trait of being investment-related frauds that promised extravagant profits and extensive false advertising.
Crystal Blockchain estimates that over US$14 billion in cryptocurrencies were stolen between 2011 and 2022. It should however be noted that these numbers frequently seem distorted, underestimated, or differ across news sources in the crypto space. When looking at that same period, notable scams have made their way to mainstream media, damaging the reputation of a sector home to genuine innovations that are on track to transform the global financial system.
Top 4 crypto scams
One of the most egregious and well-known crypto scams was the BitConnect scam. BitConnect was a lending and exchange platform powered by the BitConnect Coin, founded by Satish Kumbhan in 2016. Users exchanged Bitcoin for BitConnect Coin (BCC) on the Bitconnect platform with promises of astronomical returns of up to 40% per month on their investments. The initial deposit used calculated the returns, meaning a user could make a larger profit more quickly if they invested more. In addition, the scheme guaranteed investors a daily return of 1% no matter how much funds they put up.
Due to the influx of new and seasoned investors attracted by this tempting offer, the scam project rose to prominence with a market cap of over $2.6 billion and the coin value exceeding the US$400 mark.
Besides its extensive digital and event marketing efforts, BitConnect employed many multi-level affiliate marketers and a referral program to lure in new investors, who could work their way up by bringing in even more new investors. Using funds from later investors to pay earlier BitConnect investors was a classic Ponzi scheme.
Using investors’ money to trade on the volatile cryptocurrency exchange markets, the so-called “BitConnect Trading Bot” and “Volatility Software” deceived investors into believing they could make significant profits and receive guaranteed returns. In reality, this was just a front for the Ponzi scheme.
The house of cards collapsed when authorities and the media noticed the warning signs. The administrators soon closed its lending and exchange, which caused the price of the BitConnect Coin to drop to zero in a matter of days. The BitConnect ploy’s founder is guilty of operating a $2.4 billion global Ponzi scheme.
The One Coin Ponzi scheme defrauded investors of $4 billion between 2014 and 2016 and has resurfaced in the news. Ruja Ignatova, commonly referred to as the “crypto queen” is now part of the FBI’s most wanted list since her disappearance in 2017 following the scam.
One Coin was founded in 2014 and promoted as the “Bitcoin killer.” In reality, One Coin was not a cryptocurrency, as it never even had a blockchain behind it. The primary business model around One Coin was selling educational packages, such as courses on cryptocurrencies, to its investors. The course packages, priced between $100 and $100,000, included tokens buyers could use to mine the fictitious cryptocurrency, One Coin. The educational material was a component of a multi-level marketing (MLM) scheme in which buyers received incentives for recruiting additional participants.
Investors who held One Coins could only exchange the coin for fiat money through a private marketplace called “xcoinx.” Only those members who purchased more than just the beginner package had access to the exchange. Furthermore, the accounts also had selling restrictions based on the type of education package purchased.
Authorities worldwide and governments raised several red flags, and in early 2017, the project and its internal market shut down, leaving investors empty-handed.
Unlike the Ponzi schemes mentioned above, Thodex was a Turkish-based cryptocurrency exchange that pulled an exit scam on its users. Thodex was established in 2017 by the founder Faruk Fatih Özer. The exit scam took place in April 2021, during the height of the bull run that saw the price of Bitcoin reach US$ 62,000.
The exchange first informed its users of a six-hour maintenance window for the online platform, followed by a statement mentioning that it had ceased operations due to a “partnership offer.” Then, in an undated statement posted on its website, the exchange claimed that it was looking for outside funding to serve its clients better and that operations, including withdrawals, would temporarily be halted for five working days.
However, this statement was inaccurate as the exchange shut down the platform altogether, leaving over 400,000 users with lost funds. Furthermore, Faruk Fatih Özer fled Turkey with digital assets valued at US$ 2 billion right after the exchange shut down. Turkey has begun extraditing the founder of Thodex after his arrest in Albania in August.
Bitclub Network was a cloud-mining Ponzi scheme launched in 2014, advertised as “the most innovative & lucrative way to earn digital currency.” Cloud mining uses rented cloud computing power to mine and earn cryptocurrencies from a cloud mining company without the user needing to install or run the necessary hardware and software.
Although many cloud mining websites exist, Bitclub Network took advantage of this opportunity as a lucrative method of extorting funds from their unwitting victims. The scheme was simple. They provided users with a range of packages for daily profits and withdrawals. In reality, Bitclub Network had no access to any cryptocurrency miners. Instead, the plan was to draw in new investors to compensate the older ones while keeping most of the profits. Over four years, the team behind Bitclub Network defrauded investors of US$722 million.
This article has highlighted the biggest crypto scams that have taken place in the industry over the past decade. Unfortunately, new methods to lure individuals out of their savings through social engineering and misdirection are constantly growing.
The high-profile scams of yesteryear have taught us that education and information are an investor’s best line of defense against crypto scams.
Ankur Vaid from Reflexical
Institutional and investor sentiment has suffered with these high-profile scams, but some of the most innovative projects’ core technologies remain unchanged. To be a part of this revolutionary industry, the onus is on the investor to seek financial education, perform due diligence on crypto safekeeping, and engage in ethical investment practices.