Online Research: Are Cryptocurrencies Scam?

Online Research: Are Cryptocurrencies Scam?

This question has appeared repeatedly in multiple articles by more or less credible media focusing on cases, where operators and scammers have taken advantage.

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In the cryptocurrency market bitcoin is the undisputed leader – you can buy, sell, pay on e-shops, donate and exchange bitcoins. You can turn them into cash over ATMs, everywhere where the bitcoin network has opened ATMs. However, the lack of corporate structure and the multiple operators responsible for the way bitcoin develops and operates has put forward since its establishment one critical question: is Bitcoin a scam or is it, maybe, a Ponzi?

This question has appeared repeatedly in multiple articles by more or less credible media focusing on cases, where operators and scammers have taken advantage of bitcoin limitations. A brief online research shows that bitcoin continues to have a dubious reputation and faces skepticism despite the positive regulatory developments in the industry. The accusations of being a fraud or a Ponzi, including the verdict over the so-called Bitcoin Savings and Trust (BTCST) in the US (Litigation Release No. 23090, issued by U.S. Securities and Exchange Commission, September 22, 2014) describing BTCST as Ponzi, still plague the way cryptocurrencies are perceived in general. The most recent case is the so-called Bitcoin investment Ponzi called Ecoin Plus that closed its website and left investors with nothing just a few days ago.

Besides bitcoin, we have found many examples of other cryptocurrencies that have been pointed out as scams, including  Dash Scam, Ethereum Scam, Ripple scams, Litecoin scams, OneCoin Scam, Bancor Project Scam and much more. Therefore we can conclude that a brief review of the internet shows that all the popular cryptocurrencies have been involved in publicity referring to them as scams. However, we found out only a verdict over bitcoin operator, described as a Ponzi by a US judge in a verdict – the Bitcoin Savings and Trust, owned by Trendon T. Shavers.

The interesting thing is that the problem of bitcoin scams and Ponzi publicity can be traced to credible, global media sources and not only blogs and news sites founded by enthusiasts. Scam publicity about other cryptocurrencies can be mostly traced to bitcoin-related news sites and blogs but in very few cases to credible media. We tried to find out therefore if the problem with bitcoin scams can be linked to a limitation related to it?

Additionally, our online research showed that the bitcoin lobby, operators, and enthusiasts are extremely hostile and openly aggressive to publications clearly showing the limitations of bitcoin. Many online blogs of the bitcoin community also attack cryptocurrency brands with publications calling them a scam. Some of them maybe are but how such claims can be made objectively (not based on the personal subjective opinion of the author) remains to be clarified by the authors of such articles. These issues highlight the problem of lack of objectivity of publicity related to the industry.

What is a Ponzi Scheme?

A Ponzi scheme is a scam that started with a man named Charles Ponzi in 1920. Ponzi schemes pay returns to early investors by using the money of new investors into a fictional enterprise. When designed deliberately, Ponzis resemble a fraudulent scheme, promising high rates of return with little risk to investors. Ponzis use the money invested in the company with the promise to pay interest to earlier investors, with the debt building up like an inverted pyramid, which is why such schemes are often known as pyramid schemes. The Bitcoin Savings and Trust is an example of such Ponzi scheme.

Examples of deliberate Ponzi using bitcoin include the BTC-Arbs high yield investment program (HYIP) cryptocurrency scam only lasted a few months in the first quarter of 2014; Bitcoin Trader, another HYIP Ponzi lasted almost a year – from late 2013 till October 2014; From 2013 til end if 2014, two Litecoin scams that did not last more than a year, Fibonacci and Litecoin GEAR, have caused significant losses of credibility for Litecoin. Similar examples can be found online for almost all cryptocurrency brands.

When occurring naturally, Ponzis usually do not have a founder (owner), creating a frenzy of expectations that end in a huge crash.

Ponzi schemes are prone to the test of time and last for a very short period of time, usually for some months. Thus if a company endures years of developing its business, especially if operating in a new and innovative industry such as cryptocurrency and succeeds to establish itself instead of collapsing, it most likely isn’t a Ponzi scheme. Especially not a deliberate Ponzi scheme.

However, naturally occurring Ponzi schemes that do not have  a founder (owner) create a frenzy of expectations and tend to get longer to end in a huge crash, because the speculators investing in such a venture have the interest to keep the Ponzi running until they lose interest, take out their investment and move their money elsewhere.

An article in Investopedia adds:

“These scams last often only a couple of months, but the organizers are prone to simply repeat the whole process again afterwards.”

Because it is generally hard for people to assess whether a company or initiative is a Ponzi or a fraud, businesses can become a target of black publicity by rivals claiming it is a Ponzi or a fraud. In the case of bitcoin, because of the vast number of the network of bitcoin operators and various cases of scams, there are online guides explaining how to spot a bitcoin scam. But these are examples of deliberately created Ponzis aiming to quickly take advantage of investments and their lifespan, therefore, is but a few months.

Why are concerns about Ponzi, pyramid and fraud schemes so common in the cryptocurrency industry?

According to financial experts, cryptocurrencies may be a means for more convenient and cheaper way to make a payment but the mass user (customer) seems to have a problem comprehending the concept of virtual money – something that exists digitally but not physically. Contrary, fiat money can be seen, touched and kept in a wallet.

Despite gaining a momentum, another digital tool – the token, is also hard to understand and comprehend by the mass user. According to data compiled by Bloomberg: “Digital tokens tied to the blockchain platform issued this year have more than doubled in price on average since trading started. Tech start-ups are increasingly selling coins that can be used on their projects instead of resorting to traditional financing methods such as venture capital.” (Bloomberg, June 5, 2017).

Being popular mainly in the fintech and finance communities, among innovators and influencers, the blockchain technology and the based upon it various cryptocurrency brands face skepticism and suspicion by the general population. The cases of Ponzis using bitcoin further complicate the mass acceptance of cryptocurrencies and affect their reputation.

In 2013, Eric Posner, a law professor at the University of Chicago, added another view to the debate by stating: “a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.”

But why are there so many cases of bitcoin fraud, Ponzi, and scams? Is that because bitcoin has limitations making it uniquely suited for fraudulent schemes and therefore so often used by scammers?

The  case of Bitcoin Savings and Trust Ponzi scheme

Bitcoin is the only cryptocurrency used in a fraudulent scheme described as a Ponzi in the Litigation Release No. 23090, issued by U.S. Securities and Exchange Commission on September 22, 2014.  As a result, the bitcoin operator Trendon T. Shavers, A/K/A/ “Pirateat40”, was sentenced to pay more than $40 million in disgorgement and prejudgment interest, 18 months in prison for one count of securities fraud stemming from his involvement in a Bitcoin-related Ponzi scheme. Shavers fraudulently obtained approximately 146,000 bitcoin in BCST investments by running it as a Ponzi scheme before he disappeared from the public scene. By using a non-existent company advertised over an internet forum he was able to run BTCST using bitcoin.

Why did he use bitcoin?

Using bitcoin allowed Shavers to stay completely anonymous, making it possible for him to just disappear with the money from his investors. Bitcoin uses a peer-to-peer decentralized system, where users make anonymous transfers in bitcoins. The anonymity of bitcoin aided Shavers and made it possible for BCS&T to operate the company as a classic Ponzi scheme operates. Over the duration of the scheme, Shavers fraudulently obtained approximately 146,000 Bitcoin in BTCST investments, which amounted to approximately $807,380 based on the average price of Bitcoin at the time of the scheme. He pled guilty in September 2015 and was sentenced to 18 months in prison and had to pay US$1,228,660.93 in forfeiture, and US$1,228,660.93 in restitution.


The scam cases in the industry strongly affect the reputation of cryptocurrency brands. The scandal related sells news outlets but at the same time prevents cryptocurrencies from explaining the advantages and risks related to digital currencies to the mass user through objective news content. Competitors like banks and escrow agents offering similar services with much higher fees have no interest in cryptocurrencies with good reputation that already disrupt the market. At the same time, the perception of digital currencies is strongly related to the public debate surrounding them.

In an additional article, we will explore the issue of fake news in the cryptocurrency industry and will look for answers to the questions – why & who benefits?