ZacharyZachary
18 July 2022
Jul 2022
31 min

Some of Crypto’s Biggest Scams

Where there’s money, there are snakes and snake oil salesman.

As we’ve seen over the past few months in the blockchain industry, nefarious market participants and companies don’t do so well when prices go down and their collateral gets liquidated. On the way up, everyone is making money so no one complains but on the way down, there are lawsuits.

It’s important to remember that in many of these cases, the majority of money lost is by retail investors, not wall street aficionados or venture capitalists who can afford to lose. There are many stories of people losing their entire net worth in risky investments that were marketed to them as safe. In the case of Terra Luna, $60 billion dollars of combined value in LUNA and UST effectively went to zero within a week.

For some perspective, Bernie Madoff’s Ponzi scheme that rocked the traditional finance world in the early 2000s was roughly $50 billion dollars at its peak. Although Bernie’s scam involved mostly rich people’s money, there is still no justification for it. When it comes to retail investors, it’s a different story. You’ll see the suicide hotline being shared across social media and support sites when prices decline as there is no recourse to recovering money lost in these scams.

When it comes to someone shilling their own bag and dealing with the consequences, it’s hard to sum it up more precisely than the following tweet.

In light of companies like Celcius, asset firms like 3AC, and crypto protocols like Terra Luna either defrauding or misappropriating their customers’ funds, now is a good time to talk about DeFi.

DeFi Could Fix This

While DeFi is only a few years old and experiences its own hardships, the highest quality protocols are becoming more battle-tested as time goes by.

In each of the above cases, there were centralized entities behind the scenes that were manually committing the misdeeds that would ultimately lead to an untimely downfall. Essentially, there was too much leverage and unrealistic promised returns involved.

There were no algorithmic functions within a DeFi protocol failing or being exploited. In fact, the transparent nature of DeFi would have prevented any of the catastrophes that Celsius, 3AC, or Terra Luna experienced as the bad behavior would have been immediately evident on a blockchain and observant market participants would have, hopefully, noticed.

In the case of the Ronin bridge hack, it took 5 days for over $500 million missing dollars to be noticed.

That was bad. The blockchain industry is as imperfect as it is ambitious.

Let’s look into a few other bad situations that have taken place in crypto over the years.

1. Thodex

Thodex was a Turkish crypto exchange that paused withdrawals indefinitely and then never repaid back its customers’ funds. Roughly 400,000 investors lost around $2 billion and police detained over 80 people in Istanbul and Albania.

The majority of the Bitcoin was laundered through Bitcoin mixers. Mixers, similar to Tornado Cash, are online protocols that allow individuals to pool together Bitcoin transactions to make tracing them more difficult. While mixers and privacy services can make things more difficult, time will tell if it will ever become impossible to trace blockchain transactions. Currently, it’s not impossible but authorities largely don’t have the money or manpower to go after the cutting-edge technology that is taking place on the fringes of these exploits.

2. Quadriga CX

Quadriga CX was a Canadian Bitcoin exchange that ended up being just another, you guessed it, Ponzi scheme. You may start to understand why the term Ponzi is so often associated with crypto. Bad, centralized actors have been exploiting unsuspecting crypto investors, and not nearly enough have had to deal with any consequences. Such is the case with Quadriga CX’s previous CEO, Gerald Cotten.

Gerald Cotten was a serial internet scammer who opened up an exchange in Canada and eventually employed the notorious DeFi degen, 0xSifu. 0xSifu has amassed a fortune in crypto and has been associated with a number of reported rug pulls although he has garnered a supportive online following. He claims that he was unaware and or not in charge of the misdeeds behind the scenes at Quadriga CX.

What’s amazing about the Gerald Cotten story is that he might have faked his own death. There’s a podcast and a Netflix documentary about it so you be the one to judge, but there are many reasons to think he got away with it. He traveled to India with his wife, he supposedly died but there was nobody, and then no one was ever able to find the keys to the Quadriga CX wallets which held hundreds of millions in customer deposits. Leading up to this event, customers would be unable to withdraw their funds to their bank and would occasionally receive cash sent to them in the mail.

You be the one to judge if Gerald is still alive. Here’s a link to the podcast and the Netflix documentary.

3. OneCoin

OneCoin was a Ponzi scheme that involved a centralized currency masquerading as a decentralized coin. Between 2014 and 2017, a Bulgaria-based company registered in Dubai accumulated over $4 billion dollars in global profit before 98 of its workers were prosecuted while two got away.

The main selling point of OneCoin was a member-only program that taught customers about cryptocurrencies and how to mine OneCoins. This mining was not real as the block rewards were being distributed from OneCoin’s servers and the educational material was largely plagiarized. Customers were spending between 100 and 118,000 euros for “packages” of OneCoins and educational material.

In January 2018, Bulgarian authorities seized OneCoin’s offices in Sofia, and in May, the Central Bank of Samoa placed a ban on all transactions connected to OneCoin. Ruta Ignatova, the alleged “crypto queen” behind OneCoin went on the run before being caught and is still at large. She is currently on Europol and the FBI’s most wanted lists. In the case of the FBI, she made it to the top 10.

Read the US Department of Justice’s report on OneCoin here.

4. BitClub

Over $722,000,000 was stolen from investors by BitClub, a Bitcoin cloud mining pool service that ended up being another Ponzi scheme. From 2014 to 2019, BitClub ran mining pools that required external investments to be locked up in order to be exposed to yields from the mining activities. The 35-year-old programmer who plead guilty to establishing this scheme admitted to exaggerating BitClub’s mining activity in order to keep the “sheep” around.

Investors would pay between $100 to $2000 to join BitClub’s cloud mining service which is an immediate red flag as many Bitcoin mining pools let you join for free. They employed multi-level marketing tactics by requiring that you need to have a sponsor. The unofficial owner and “master distributor” behind the scenes was convicted sex offender, Russ Medlin.

After years of using BitClub, investors began questioning its tactics as they were losing thousands of dollars in unexplainable ways. This would lead to BitClub’s downfall in 2019 when US District Court prosecutors charged its founders with fraud.

5. BitConnect

BitConnect was yet another Ponzi scheme. It promised extremely high returns but only paid out existing loans with new investments. Before we break down its downfall, let’s watch this iconic video.

After being founded in 2016, the company closed its doors in 2018 after it was outed as a scam. There was a BitConnect token that traded between $0.17 and $460 before crashing to $0. This took place shortly after they raised $40,000,000 by charging a minimum of $20,000 per audience member at the conference featured in the video above.

We don’t really need to dive into how it worked much further as it’s your run-of-the-mill Ponzi scheme. Investors would invest with the hopes of a high yield but they would be paid with proceeds from new investors. Once new investors stopped investing, the whole operation crashed.

For a more in-depth understanding of what happened to Carlos Matos and BitConnect, watch this.

Conclusion

While the above stories are interesting, they fail to show the pain that people experienced in losing money in these scams. Not everyone has the time to research investments or monitor market activity and some are susceptible to the mammalian marketing tactics that hone in on an individual’s weaknesses, basically by inducing FOMO – fear of missing out.

It’s extremely important to do your research when it comes to investments and which companies you want to deal with. Some exchanges are safer than others, and some DeFi and NFT protocols are definitely safer than others. Learning and practicing risk management is the only way to avoid falling prey to a crypto scam. Don’t click on any suspicious links. Never let your password or recovery phrase get into anybody else’s hands and look into the background of the companies and exchanges you trust your money with.

Continue learning about operational security practices and be sure to establish a strong foundation of what crypto is about by finishing Solflare Academy’s Crypto Fundamentals Course and keep on keeping on!

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