BitConnect is a cryptocurrency that was initially posted on BitcoinTalk in November 2016. Since then it has gotten a lot of attention, albeit much of it has been negative. The reason for this negative attention is because many people suspect that this service is nothing more than a ponzi scheme. Others defend BitConnect, saying their users profit and thus there is no scheme. In this article I will present to you exactly how they are able to run this scheme while keeping their users happy.
Essentially what the BitConnect service says it does is take your Bitcoin, immediately convert your Bitcoin into BCC (their own token), and pay you interest from their earnings on their “trading bot” (interest is paid in BCC, not BTC — this fact becomes very important later). The interest rates are very impressive, with users reporting an average of about 1% per day. BitConnect’s projections on interest can be found here. BitConnect’s main business proposition is: we can invest better than you can, so give us your Bitcoin and we will send you some of the earnings we made from investing it.
The first question a speculative investor should ask is: Why? If you have this incredible ability to trade an asset in such a way that you have virtually no risk and tremendous upside, why would you allow little old me to reap the benefits of that? If you’re able to get 1% per day on $100,000, in one year you’d be looking at close to $4,000,000. Their method of trading would truly be revolutionary.
Unfortunately, it’s very unlikely that they indeed have a special trading bot, or are trading anything at all. When you look at their initial post on BitcoinTalk, it’s obvious that they performed a pre-mine to generate at least 4.8 million coins. On top of that, they have adopted a Proof of Stake / Proof of Work system. Proof of Stake essentially means that you’re rewarded interest in exchange for not selling your coins. The interest rate they will reward you is shown below:
Proof of Stake allows them to accumulate interest on their pre-mined coins. Let’s assume they kept only 2,000,000 BCC from their pre-mine. Their current holdings would look like this: 1,543,122 BCC (interest from Jan 2017 to June 2017) + 160,000 (interest from July 2017 to August 2017) =1,703,122 BCC accumulated in interest from Jan 2017 to current. In USD at the current USD/BCC rate, this would be $102,187,320. Remember, this is from interest alone.
If you could generate that kind of income passively, would you ever consider trading?
Hopefully by now, it’s clear how BitConnect is able to provide their users with BCC tokens on a daily basis. They have a virtually infinite supply of them due to the fact that they have staked millions of BCC which they are accumulating interest on. So in essence, the interest they are paying you is not their returns from trading, but simply just the interest they get from their Proof of Stake system!
Just for fun, let’s see what fraction of their BCC holdings they need to redistribute to their users to keep them happy. First we need to make some assumptions because I am unaware of how many users they have and what average amount of Bitcoin their users send them. I think the following assumptions are reasonable:
10,000 users, with an average BTC deposit of 0.1 (~$220 at the time of writing this). This means that they have approximately 1,000 BTC in holdings. For an average user of 0.1 BTC, in 1 month they should expect around 0.035 BTC in interest if they’re getting 1% per day. Multiply this by 10,000 users and you get 350 BTC per month that they need to pay their users… But they don’t pay them BTC, they pay them BCC!
So in 1 month they are expected to pay their users approximately 350 BTC * (40 BCC / 1 BTC) = 14,000 BCC per month.Earlier in this article, I calculated the approximate amount they made in interest due to the fact they are staking their pre-mined coins. In this month alone, assuming they staked around 2,000,000 coins, they have accrued about 160,000 coins. That 14,000 BCC they need to pay their users is a mere afterthought.
Having a look at the richest BCC address, which I think is more than reasonably assumed to be owned by BitConnect, they can easily sustain 100,000 users just on the interest accrued from this address alone!
Many people defend BitConnect’s business practices based on the fact that they are able to pay their users BCC coins. Well, now you have a clear understanding as to how they’re able to do that. BitConnect has found a way to take your Bitcoin, give you nothing in return and keep you happy in the process (you don’t realize they’re sending you a tiny fraction of the interest they’re getting from their pre-mined BCC coins). Amazing!
The scheme is quite impressive, and it highlights how dangerous Proof of Stake systems are to the cryptospace. The creators of the coin, through the magic of compound interest, are able to amass a virtually infinite supply of their coins. Through clever marketing and an active referral system, they basically have a license to print money, for as long as people don’t realize they’re getting stiffed.
If you’re going to gamble your Bitcoin, have some fun while you do it with a legitimate company like www.nitrogenesports.eu
A user @jollogakar had a concern regarding the fact that BCC prices your interest in USD terms. Read my response to know why it’s meaningless what currency they price your interest in.