Headline: BitConnect is now dis-connected?


Body:  Continuing with the thread of scams within the high-tech world, I was just watching a podcast that mentioned BitConnect.   They had a 30-second snippet from a company meeting, and it looked like a rock concert was being held in the compound of a very secretive cult.   Then I found this disclosure by the DoJ.  “BitConnect Founder Indicted in Global $2.4 Billion Cryptocurrency Scheme.”  It certainly made me want to know more.

Quick caveat here.  This is an indictment, and he has not been found guilty.   (It is sometimes said that you can indict a ham sandwich.)  But, unless they had a good case, I don’t believe that the Federal Government would be prosecuting him for this crime.  But, until convicted, he is to be considered innocent.

What is a Ponzi scheme?

It is not when a leather coat wearing greaser runs in the room and says “AAAA!!”  That’s a Fonzi scheme, and very different.    A Ponzi scheme is where you find a few gullible and greedy investors who sign on to get incredible investment results.  Each one then tells their entire network about the returns etc.   All the while, the first investors are actually being paid out of the investment of the subsequent investors.  For a short period of time, the instigator of the scheme looks like a real brainiac hero.  The key here is that the scheme always falls apart at the end, and the hope for the instigator is to be on a tropical beach (in a non-extradition country) by the time the jig is up.  The key for law enforcement is that the “investment opportunity” is a sham.  In this case, a $3.4 Billion sham.

In somewhat plainer English, what Mr. Kumbhani is accused of doing is suggesting that BitConnect had some sort of proprietary software that would allow them to make money from the extreme volatility of the cryptocurrency markets.  Investors would stake their own cryptocurrency with BitConnect in the hopes of earning a handsome return.   He ran this scheme for about a year, and then shut it down. (Probably due to cease & desist letters from Texas and North Carolina.)  The scale of this shutdown should be placed in context; Within a few hours, the cryptocurrency was trading at an 80% discount.   People got really hurt.

At the same time, he pressured his promoters to manipulate the market value of its own cryptocurrency to make it appear to be still valuable.  There also seems to have been some flavor of money laundering going on among cryptocurrency wallets around the world and any number of exchanges.  (This is sexy stuff, isn’t it?   Sorry, I probably should’ve warned you.) 

He faces these fraud charges in addition to wire fraud.  Currently he is “at large” but I suspect that this will change when a reward is offered.   The Federal Government machine has a very long memory too.

OK, this is a nice bedtime story.  Why tell me?

I am telling you this story to arm you against the fraudsters of this world.   There are a couple of very serious things that could be done by the “normal person” to keep themselves from falling victim to this:

  1.  I have said it before, I’ll say it again, if something appears to be too good to be true, it probably is.    If the promised returns appear to be astronomical and promise the stars, look carefully to be sure you aren’t being mooned.
  2. Do your own research.   When asked by a reporter how his software works, Mr. Kumbhani said that he cannot explain anything for “privacy reasons.”   If you ever see this, you should carefully consider just what is being hidden from view. 
  3. Greed is a powerful emotion.  If you are to be a successful investor, you must find a way to avoid being blinded.   Many of my friends have decided that they must be able to convince their wives.   If they can’t, then there’s probably a reason, and they pass up the opportunity.  In the alternate, if you are not married, you can have a “conversation” with a friend, or perhaps yourself.  If you can write a letter to a friend explaining this opportunity, and then re-read it a few days later you still get excited, then you might be on to something.  Have a system of some sort for slaying this green-eyed monster.

The Verdict

“Crime, particularly crime involving digital currencies, continues to transcend international boundaries,” said Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division.  This ability to electronically and instantaneously send money to all corners of the world, and transact in all different currencies, make it very much more possible for people to run schemes and successfully launder the funds.  Fortunately, the governments of the world are slowly coming to understand a bit about the new threats they face.  As far as the U.S. is concerned, there is a very powerful law against wire fraud of all types, so it is difficult to envision what illicit activity will not be prosecuted.  Especially, as in this extant case, the man who was the lead promotor for U.S. accounts has already pleaded  guilty to conspiracy charges.

The take-home point of this piece is simple.  On your investment journey, there will be stories of exotic investments in far-off lands, all the time.  When you hear of these stories, ask yourself what the source really is.  After all, if the opportunity is real enough to believe in, would you be dealing in rumors?






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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