The Greater Fools of BitConnect

12 min readDec 6, 2017

An Analysis of the cryptocurrency. Graphic and edits by Mitchell Opatowsky

“Greater Fools” refers to the notion that you can be fooled into buying something of little to no value and still profit from it, provided you can sell it to a greater fool for a higher price. This term is often applied to asset bubbles where a greater fool dynamic pushes prices ever higher. No one is concerned about value as they are confident they can quickly flip the asset for a gain to a greater fool. When it comes to Ponzi schemes, this dynamic is doubly true.

In 1918, Charles Ponzi, an Italian immigrant who had already been to prison twice, figured out that he could buy International Reply Coupons (IRCs) from Spain and exchange them in the United States for more expensive stamps. He would then sell the stamps and earn a profit on the difference. Rather than being satisfied with these profits, he lured investors into his scheme with promises of 100% returns in 90 days. However, instead of bothering to buy IRCs and exchanging them for more expensive stamps, he simply paid off existing investors with funds gathered from greater fools more than willing to become new investors. For a time, he was very rich, reportedly making $250,000 a day. He pulled it off for a couple of years but, in 1920, the Boston Post began to investigate his activities — meaning someone looked critically at what he was doing. As a result, investors began demanding their money back and, since he didn’t have new investors to pay off existing investors, his scheme collapsed.

Thus, Charles Ponzi went to jail for the third time and forever lent his name to this type of scam.

The essence of a Ponzi scheme lies in paying “returns” to existing investors with funds gathered from new investors. A scheme such as this depends upon credulous investors who do not demand independent audits verifying how those returns were generated. Individuals with more money than sense are willing to hand over funds without expecting any proof or accountability from the perpetrator. There is no transparency as to how the investments are made. Furthermore, if investors can be prevented from withdrawing their funds, then the scam can persist for longer than it otherwise would, especially if new investors can be brought into the scheme.

It is with these principles in mind that I cast my eye upon BitConnect.

BitConnect is a cryptocurrency protocol and offers the BitConnect Coin (BCC) as the native token. BitConnect claims that users of their platform can earn BCC four different ways: 1) You can “Trade” your BCC and presumably make money by being a savvy trader, 2) you can “Mine” BCC on your computer, 3) you can “Stake” your BCC and earn interest, or 4) you can “Invest” your BCC and earn great “returns”. They also have a referral program where you get paid a bonus to bring in other saps.

The mark of a con artist is their ability to take the completely ordinary and reframe it to sound extraordinary to their dupes. Throw in promises of fantastic returns without any transparency or proof and you’re sure to lure some poor suckers. BitConnect manages to do all these things.

Of the five snazzy “features” outlined above, three are common to all cryptocurrencies. Let’s start with the most common of all… Trading your BitConnect. Absolutely everything of value in the world can be traded and/or consumed. If something cannot be consumed or utilized in some process, it has no value unless it can be exchanged. Until someone found a way to exchange Bitcoin for pizza, Bitcoin had no value. Being able to trade or exchange something is fundamental and does not represent a compelling feature.

Now let’s look at “Mining”. Every cryptocurrency employs some sort of proof type to secure the integrity of the blockchain, proof-of-work being the most common, although this area is rapidly evolving. BitConnect claims to employ two proof types; proof-of-work and proof-of-stake. Earning BCC through “Mining” refers to downloading and running their mining software and earning BCC through their proof-of-work scrypt algorithm.

4,819,323 BCC were pre-mined and issued through an ICO when the first block was mined on December 24th, 2016.

With two-minute block times and block rewards of 10 BCC per block, about 2,628,000 BCC have been mined through November 30th, 2017. That’s an increase of 54% above the initial pre-mined amount in less than one year.

As for the “Staking” feature, in addition to proof-of-work, BitConnect also claims to use proof-of-stake. Proof-of-Stake is another way of ensuring blockchain integrity, though it is anyone’s guess as to whether the staking algorithm BitConnect employs contributes to network security. Most likely, it is simply a ploy to remove BCC from circulation and, thus, keep supply off the market.

If you hold your BCC in BitConnect’s wallet, you begin to earn what BitConnect refers to as interest, which is paid by the protocol simply creating new BCC. Currently, staking generates an additional 8% of the amount staked per month. This rate decreases every six months by one-to-two percentage points through the end of 2019, at which time the staking program ceases — assuming BitConnect bothers to keep the whole thing going until then.

How much has the supply increased due to staking? Given that the total supply of BCC is currently 8,749,773, as of this writing, we can infer the amount of BCC created through staking. By subtracting the 4,819,323 BCC pre-mined and 2,628,000 mined through proof-of-work, we can assume that approximately 1,475,320 BCC have been awarded as “interest” through proof-of-stake. This represents an additional 30% increase in supply over the initial pre-mined amount.

While this near doubling of the initial supply through mining and staking in less than a year seems troubling, in and of itself it isn’t necessarily a problem. Supply must be considered relative to demand and if the network of users and number of transactions expands rapidly enough, this can negate even very rapid supply increases. Also, supply isn’t really supply provided it is kept out of circulation. The incentives employed by BitConnect to keep BCC out of circulation is key to maintaining the charade.

Take a critical look at that “interest” number. A rate of 8% per month represents a compounded return of 151% annually (if you denominate your returns in BCC), which assumes you keep the BCC you earned in the staking wallet, thereby earning interest on interest. A return of 151% per year through interest, with no risk, should be a major red flag for a critical mind.

For starters, as far as incentives go, this far exceeds any rate conceivably necessary to secure the blockchain through proof-of-stake. By way of comparison, the staking on the Neo network pays about 1 Gas per 2200 Neo staked per day. That’s 18% annualized. Certainly, this is a great return, assuming Gas holds its value, but BitConnect pays more than eight times what staking through Neo pays. Also, staking on Neo comes with the risk that you can lose your stake if you back the wrong chain.

I can find no evidence that the BitConnect proof-of-stake imposes any risk. However, there most certainly is an incentive — an incentive to keep your BCC off the market. Effectively, the promised return through staking is a bribe to prevent you from dumping your BCC, at least for as long as they care to keep the game going.

But staking is not the only way that BitConnect attempts to restrict the supply. The second way is through what they refer to as “Investing in BitConnect Lending”.

Now, the grammar throughout the website is horrendous, but the section that describes this program is particularly frustrating, or deliberately obfuscating, depending on your interpretation. In fact, it is so bad, that the best I can infer, without becoming another mark in the BitConnect con, is take an educated guess as to what is happening. Moreover, what they claim to do doesn’t matter. That is because they can claim to do almost anything given the astonishing lack of transparency, channeling the spirit of Charles Ponzi as best they can.

It seems like the trading bot and volatility software are the same program, though, based on how you receive your profits, it doesn’t really matter.

Here’s my educated guess at what they are doing. With the BitConnect Investing program, you lend them your BCC for periods ranging from four to ten months, depending on the amounts you lend. The lending program pays up to 40% per month in interest, depending on the performance of their trading bot/volatility interest software, plus a daily bonus of up to 7.5% per month depending on the amount you lend.

One of the glories of blockchain technology is that transactions are transparent, so we should be able to see the trades that the bot/software are undertaking to generate profits. This doesn’t mean that we must see the business logic running the bot, but simply transparency as to the trades it executes. The proof from a ledger of this sort does not seem to exist.

Regardless of the transparency that Blockchain technology enables, producing an audit of those trades should be a basic expectation of any investor — so basic that it pains me to even feel the need to call it out. If someone can produce an audited transaction trail of the trading activity of the bot or volatility software, please share it and I will stand corrected. However, in the absence of any proof, it is safe to assume that there is no bot or genius software producing such miraculous and consistently positive returns.

To participate in the Investing program, one must “deposit” some Bitcoin, for which you receive BCC. Now, rather than being free to spend your BCC, you must “lend” it back to them. In this way, BitConnect now has your Bitcoin and simultaneously managed to tie up your BCC.

What’s wrong with this? First, they use the word “deposit”. At your bank, your checking account is a demand deposit, which is a loan to the bank. The bank uses the money you deposit to buy bonds, make other loans or generally find some way to earn a return on your money. In return for lending them money, they may pay you interest… however meager it may currently be.

With BitConnect, if you were truly depositing your Bitcoin for a fixed term and they agreed to provide you a return, then the transaction would be simply you depositing bitcoin with them and receiving a promissory note in return. That would be the end of the transaction. At the end of the loan term, you would get your bitcoin back with interest unless the interest was paid out along the way. However, you are not really depositing Bitcoin with them. You are selling them your Bitcoin in exchange for BCC and then agreeing to lend this BCC back to them, in exchange for some promised return.

In any case, now that they have your money, how do you get your returns? You are indeed shown a screen with your “profits” in U.S. dollars but you cannot withdraw those dollars. You must convert these dollars back to BCC through BitConnect’s exchange. Are there actual U.S. dollars being exchanged for BCC? Unlikely. Hence, the U.S. dollar amount you are shown is merely a representation of value — a paper profit in the extreme. From there, you can choose to do what you would like with your newly earned BCC, including investing it back into their lucrative program!

The problem is that the “Invest in BitConnect Lending” program represents a self-contained system with no external validation. Investors keep their supply off the market through either the staking or investing program. The BCC that go into the investing program (and possibly into the staking program as well) are used to monetize the claimed returns from its investing program. New investors who, in turn, put their BCC into these programs, further enable this dynamic.

Unless someone can show what happens to the BCC that gets tied up in the investing program, it is safe to assume that BCC “invested” in the lending program form a pool of BCC. The BCC in the pool are sold back to investors when they convert their U.S. dollar paper profits back to BCC. This pool of BCC provides the perception of liquidity and returns. This dynamic can perpetuate itself so long as the pool is filling up.

Once people begin to exit the system by selling their BCC or a surfeit of new BitConnect investors suddenly emerges, you’ll find that the trading bot/volatility software is swimming naked.

With the investing and staking programs, they have, so far, managed to significantly limit the supply of BCC in circulation. The magnitude of this restriction can be seen through the difference between total supply and circulating supply. Per Coinmarketcap.com, the circulating supply is only 2,138,092. That means that 6,611,751 BCC are not considered circulating. Roughly 3 times the number of BCC counted as circulating are tied up in the liquidity restricting programs of staking and lending.

There was a lot of hubbub around the sudden drop in BCCs market cap on November 4th. This drop was simply due to a change in the way Coinmarketcap calculated market cap. They switched from using Total Supply to Circulating Supply (which is a lot less for Bitconnect given their staking and lending programs). Multiplying the latter by price caused a sharp drop in market cap. The price of BCC was unaffected.

With the lending program, the BCC is locked up from four to ten months whereas the BCC tied up in the staking program can be withdrawn at any time. If a run on BitConnect were to start somewhere, it could emerge in the staking program.

Lastly, to fuel the Ponzi, BitConnect did not neglect to throw in incentives to bring in new investors. BitConnect has bolted a pyramid scheme onto their Ponzi — a multi-level marketing program they call their referral program. By referring someone to the network, meaning they bought some BCC and claimed you as the person that referred them, you get a bonus. If that person, in turn, refers someone, you get a bonus from that as well. Currently, this referral network goes three levels deep. It was seven levels deep only a couple of months ago and, prior to sometime in July, it was ten levels deep. The amount paid per referral tier has also been reduced. As of now, a direct referral pays 5%, secondary referral pays 3% and tertiary pays 2%. It seems the engine is running out of steam…

They say you can’t prove a negative but that is only true in open systems. In closed systems, you can prove a negative through its absence — and transactions within a blockchain are a closed system.

The proof of the scam that is BitConnect lies in the profound absence of proof that anything of value is being done. If there is no proof that the staking algorithm secures the network, then it doesn’t. If you can’t prove, through BitConnect’s blockchain, what happens to the BCC tied up in the staking and investing programs, then you can prove someone is hiding something (my bet is that they are used to pay out returns and provide liquidity). If you can’t withdraw the U.S. dollars that the trading bot supposedly earned directly then you can’t prove that the dollars were there in the first place. If the bot/volatility software trades traditional currencies and bitcoin as it claims to do, this would indeed be an open system. Providing proof through audited and verifiable trades is how to prove a positive - that there are trades generating returns -in either an open or closed system.

Rather than creating incentives that validate value creation, BitConnect has incentives in place to: 1) keep investors from selling their BCC and 2) draw in new investors. These incentives restrict the supply, however absurd that growth in supply may be, and provide fuel to pay out returns. The positive feedback loop that Bitconnect’s perpetrators have created can work for a time, but will violently reverse itself once more of the Total Supply becomes Circulating Supply or the referral program no longer brings in enough fresh meat.

There will always be those too excited by promises of exorbitant returns to step back and consider that perhaps they don’t know enough to dive into the pool in the first place. Whoever created BitConnect had their eye on this vast horde of greater fools from the start.

The lack of any true utility in the protocol and abysmal transparency are reflected BitConnect’s score on CoinScore. See for yourself on the application demo.

Questions to consider:

How can we hold this industry to a higher standard?
Who are the players leading the charge in responsible tokens?

Sources for further reading:

The Greater Fools of BitConnect

Written by Outis