An Anatomy of Bitcoin Ponzis

Ponzi is a type of scam where you promise people earnings while you don’t produce anything, and pay them with newcomers’ money.

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An Anatomy of Bitcoin Ponzis

A Very Brief History of Bitcoin Ponzis

Bitcoin’s history, sadly, can’t be separated from the word Ponzi. The history of Bitcoin is in a certain way the history of several ill-conducted scams, and while many cryptocurrency detractors will jump on the “Bitcoin is a scam” bandwagon, they would be ill advised to do so.

“For the love of money is a root of all sorts of evil” says the Bible, and it is well-known since ages past that there is a connection between greed and evil. It is not that “greed” is evil per se, as it is really okay to want to improve one’s current situation. The problem is what immoral people are willing to do in order to reach their goals.

Bitcoin is not technically money as it lacks the “store of value” attribute. It certainly is a tool for immoral people to deprive others of wealth. Take for instance Mt. Gox. While it can be debated whether Gox itself was really intentionally fraudulent, or just plain stupid, for practical purposes it was a scam. People put their money into it and poof, it was gone.

Since then, a pair of computer science researchers — Marie Vasek and Tyler Moore — from the Southern Methodist University in Dallas have analyzed a lot of Bitcoin scams and grouped them in four categories: Ponzi schemes, mining scams, scam wallets and fraudulent exchanges.

Marie Vasek and Tyler Moore — from the Southern Methodist University in Dallas

What Is a Ponzi? And Why Do Their Creators Love Bitcoin?

In a nutshell, a Ponzi is a type of scam where you promise people earnings while you don’t produce anything, and pay them with newcomers’ money.

Bitcoin is vulnerable to these type of scams for three reasons:

  • Most people do not properly understand it.
  • Other bitcoin investments can have generous returns.
  • It has an excellent scapegoat.

Since Bitcoin is not easy to grasp, many of the technicalities might confuse people who are too eager to invest and get the generous returns that some — who understand better — are making. Anyone convincing others of how legit his Ponzi is will surely take advantage of this.

Also, it is an exciting innovation that may change the economic landscape permanently, so it would be really stupid to assume that there is no big money to be earned from this.

And finally, Bitcoin has a magnificent (and legitimate) scapegoat story when things go awry: HACKERS DID IT.

Charles Ponzi

Sustainability. The Bane of Ponzis.

Like all fairy tales, the Ponzi promise has no way of materializing. As with constant population growth and oil drilling, these scams are unsustainable and thus condemned to implode miserably — simply because there is no such thing as free lunch.

Let’s take for instance PB Mining, a scam that I analyzed in the past. There was a big reason why everyone believed in PB’s operations. It had been paying consistently for a reasonably long amount of time — five years. Perhaps it had been “piggybacking” other mining ventures. No one knows for sure where their coins came from. According to my cloud mining review, PB had no proof of mining.

In that Ponzi, you could achieve a return on your investment in about 161 days (~5 months and 11 days), and many people did reinvest their earnings into more hashing power, increasing the big ball of income they were expecting to get. Remember this well: Ponzis are greed demons. They feed on it.

With such high profits and so little hassle to get them, PB was likely to be a scam,  but if the bubble was still far from bursting and I refrained from reinvesting, it would make a nice experiment and I would make a small profit at the end. It turns out I did make a profit (in BTC), but I had a net loss in U.S. dollars due to Bitcoin depreciating so much. That’s what you get for “thinking ahead.”

Let’s Coin a Term: Ponzi-Surfing

“Ponzi surfing” is the risky activity of moving money into and out of a high-yield investment program (HYIP). It is radically different from plain investing, in that the surfer actually acknowledges the fraudulent nature of the activity. The goal then, is to try and anticipate when the Ponzi will blow up, and get out of it with a positive balance. A good Ponzi surfer must then catch the wave as soon as it starts, to cash in on the money of the newcomers.

It is unknown to what extent this is plain nonsense or actually smart. Ponzi surfing is an activity akin to gambling, and is best left to inquisitive and otherwise impetuous minds.

According to Vasek and Moore, the median life of a Bridge HYIP (i.e., a traditional Ponzi) is about 125 days. Bitcoin-only HYIPs accelerate this to 37 days. In addition, many Bitcoin Ponzis are transparently Ponzis. Yes, they are “entertainment venues” catering the Ponzi surfers.

From January 2013 to September 2014, jointly, these Ponzi types have moved about US$7.343 million, of which about 88% belongs to Bridge HYIPs.

Bitcoin’s USP (Unique Scam Proposition)

Cryptocurrency is unique in the sense that it makes doing online business incredibly easy. Sadly this includes illegal or otherwise immoral software, such as Gold Coders. This creates quite the bizarre proposition: Your own online Ponzi, key in hand.

Gold Coders deliberately labels its software as a HYIP script, and promises to deliver your own HYIP site in only 15 minutes. Someone used to say that during the Gold Rush, those who made the most money were those who sold tools to miners; well these so called “Gold” Coders have sure found their vein in Bitcoin wanna-be scammers. According to research by the Technische Universität München in Germany, about 50–80% of all online scams use the Gold Coders kit. They effectively are the Levi Strauss of online scamming.

Why they continue in operation today is a mystery to me. It surprises me not to assume they know that their customers do not like to work at all to get cash. The Gold Coders website cover image even features a man with his hands resting behind his head. Easy money for lazy people.

The prudes in the audience may react badly to such software, but isn’t it hilarious? Isn’t this insanely bizarre? Isn’t it funny that googling “how to create HYIP site” turns out lots of results from providers as devious as Gold Coders? Does nobody report these things?

Concluding Remarks

Bitcoin accelerates online businesses, whether they’re good or bad. Certainly Vegas casinos have not yet adopted this new form of gambling or extreme sport known as a Transparent Ponzi, and who knows whether they will. 

The non-transparent Ponzis matter the most. Teaching people about how they are tricked into believing in such schemes’ legitimacy is a must in this crypto world. However, we should not encourage witch hunting, but instead give the benefit of the doubt to those who deserve it. Online reputation and cyber bullying are legitimate events with real life consequences.

Let it be said that Bitcoin is not evil nor a Ponzi by itself, but rather that its characteristics facilitate the creation of these disreputable entities, along many reputable ones. 


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