Bitcoin Mining Fraud Then and Now

Since the birth of Bitcoin, mining fraud has been a reality that has to be faced. From the Ponzi scheme of the trading platform Bitconnect, the futures scam of Bitcoin mining machine manufacturer Butterfly Labs to the Onecoin pyramid scheme, there are countless Bitcoin mining frauds.

These Bitcoin projects take advantage of investors' irrational expectations of returns and wantonly exaggerate the promises of project returns. On the contrary, these projects not only fail to provide any products or services that can bring returns, but even cause investors to suffer huge losses.

Ultimately, these scams triggered a crisis of trust and led to the intervention of regulators.

Before we delve into Bitcoin scams, though, let’s first categorize them.

• Vaporware - continued promotion of hardware that is "soon to be sold" but is just an idea and has never actually been developed (e.g. Butterfly Labs).

• Cloud Mining - Investors pay for the computing power corresponding to the cloud on the platform and then sit back and enjoy the benefits, while the platform handles everything for you. By providing continuous "returns", it brings users a so-called "sense of security", which usually ends when users see through the scam (such as BitClub).

• Robo trading, Tumblers and High Yield Investment Programs (HYIPs) - These projects are usually just a farce, claiming that there is a team or algorithm behind the trading. People are encouraged to participate in the scheme and are guaranteed high returns, which are usually much higher than the market average. (For example, Bitconnect).

Vaporware

Similar to the early days of the Internet, the early Bitcoin mining industry was quiet, with little of the frenzy and media hype that ICOs are today. Most of the participants were hardcore technologists and enthusiasts, but there were also scammers and hackers trying to steal people’s coins.

Since its inception, the field of BTC mining and its investment has always been full of hidden dangers. What's even more sad is that the planners behind these scam projects have become more cunning. Now that "non-existent" vaporware is no longer common, users have more legitimate options, such as large mining hardware manufacturers such as Bitmain or Halong mining.

The first and most obvious vaporware scam is Butterfly Labs. Butterfly Labs claims to sell high-performance advanced computers for generating Bitcoins, and customers are required to pay the full purchase price in advance. However, the company delays delivery after receiving payment, and in many cases does not deliver at all, causing customers to suffer losses. Even if the company delivers, the "mining machine" received by the customer is outdated and cannot achieve the expected profit purpose.

Butterfly Labs co-founders: Nasser Ghoseiri (left) and Sonny Vleisides (right)

In 2014, Butterfly Labs was shut down by the Federal Trade Commission (FTC) and charged with fraud and making false statements to the public.

The FTC’s lawsuit focuses on the company’s continued harm to customers, who did not receive mining products after the company announced that they had shipped them. The documents show that over the past two years, Butterfly Labs has consistently failed to deliver on its promises for prepaid products or services, including cloud mining contracts.

Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said:

“We often see that when new, murky opportunities emerge, such as Bitcoin, scammers will find ways to capitalize on the public’s excitement and interest. We are pleased that the court has agreed to our request to halt the company’s operations, and we look forward to returning the company’s ill-gotten gains to consumers.”

This is the first time the FTC has taken action against a company involved in Bitcoin. After Butterfly Labs was shut down, it was still unable to recover the losses suffered by its customers. But with the emergence of legitimate application-specific integrated circuit (ASIC) suppliers, the market has a higher level of judgment and measurement of fair products.

Cloud Mining

Mining cryptocurrency itself may not be a scam, but some mining middlemen are defrauding users under the guise of "providing mining services." Gone are the days when personal computer mining ruled the roost. Instead, individual participants are being lured into "cloud mining" operations - a way to participate in large-scale Bitcoin mining farms.

The method has been particularly popular among those seeking to make easy money during the cryptocurrency gold rush, but the field is already narrowly profitable and rife with thieves.

The world's largest cloud mining company: Bitclub.Network

How does cloud mining work?

Simply put, cloud mining is a process where users use the shared processing power generated by remote data centers to perform "remote" mining. Users only need an Internet-connected computer for remote management.

Typically, users are presented with a menu of mining-related cryptocurrencies and algorithm options. In return for purchasing hashrate for a particular cryptocurrency, users are paid a certain amount of cryptocurrency, sent directly to their wallet. Users can use a profitability calculator based on current market prices, difficulty, and network hash rate to determine the payout amount.

Due to the computing power of the Bitcoin network, there is a huge difference in the time it takes to mine a block, which affects regular payments and returns. At the same time, users are exposed to fraud risks due to significant fraud risks, reduced transparency, reduced profits, possible suspension of service providers, and the lack of control and flexibility caused by not owning their own equipment.

Mining pool operator CloudHashing.com has come under fire after customers complained that they had not received payments. One customer said he had purchased a CloudHashing contract since 2014.

“In the first 6 months, there were profits every day, but in November this year, there were 8 days without any new bitcoins mined, and they started to become unstable. In December, it was the same. My account had no profit for 8 days. And they stopped the profit reinvestment plan at the beginning of December. No explanation was given to customers.”

Coincidentally, from March to December 2014, the Bitcoin mining pool Gaw Miners sold a series of products and investment contracts to more than 10,000 investors, claiming that they would profit from Bitcoin mining or other virtual currency investments.

However, due to the Gaw Miners Bitcoin mining pool's covert operation of mining operations, the launch of "Hashlet" packages and the fake digital currency Paycoin, Gaw's founder Homero Joshua Garza has also been subject to strict scrutiny by the Bitcoin community. In 2015, the U.S. Securities and Exchange Commission (SEC) sued Gaw Miners, which eventually exposed the company's Ponzi scheme. Former Bitcoin Core chief developer Gavin Andresen also commented on Bitcoin cloud mining:

“I suspect that many of the Bitcoin cloud mining companies will ultimately prove to be Ponzi schemes.”

That said, we do see some blatant scams intermingled with seemingly legitimate operations that offer fair market value for products and services, which can make Bitcoin cloud mining fraud difficult to detect for some investors who have trouble filtering out the noise.

Robo Trading and HYIP Programs

Robo trading and HYIP schemes are arguably one of the most cunning Bitcoin scams. These operations use fake but well-functioning websites to attract users with beautiful user interfaces, fast daily payouts and withdrawals. The companies offering investment opportunities claim that the high returns are due to the sophisticated investment methods used to trade the digital currencies deposited by investors. But in reality, these platforms use the joining fees paid by new users to pay early participants.

Bitcoin HYIPs programs also offer so-called "high-return" referral packages to incentivize old users to introduce new users to the program to ensure that new funds enter the platform to spread the scam. In addition, users will find it difficult to get their Bitcoin assets back from these platforms because the platforms will set up various obstacles. Once these platforms generate enough funds, they will disappear and evaporate along with the investors' cryptocurrencies. In 2017, high-yield investment projects (HYIPs) saw a significant increase, including the infamous Bitpetite and Bitconnect.

Bitpetite

The way Bitpetite works is very simple. After setting up an account, users are given a wallet address (similar to an exchange) where they keep their cryptocurrencies. Cryptocurrencies such as BTC, LTC, ETH, and even XMR are usually accepted and represent this balance after sending.

The dashboard platform shows the user's investment and the returns they received from their investment. For example, the platform promises a 5% return every day, so your $100 investment will show up as $5 worth of returns in your account. The premise of how these returns were obtained includes various narratives, such as Bitcoin mining, trading algorithms, and even the collapse of the service. But most of the time, these stories are designed to keep uninformed users happy and continue to run the console.

The setup, which runs extremely smoothly and seamlessly, creates a false sense of trust in the user, who thinks “well, since it took effort, it must be legitimate.” The longer this charade continues, the more confidence the user has in this shaky investment.

Bitconnect is slightly more complicated, but similar to Bitpetite’s setup

The virtual currency trading platform Bitconnect is an anonymously run website where users can lend their cryptocurrencies to the company in exchange for huge returns, depending on the term of the loan. For example, a $10,000 loan for 180 days will give users a 40% return per month and a 20% bonus per day. In addition, Bitconnect also has a multi-level referral feature, similar to a pyramid scheme, where thousands of social network users try to use their referral codes to drive new user registrations.

The platform uses the Bitconnnect trading bot and “volatility trading software” to generate returns for users, averaging about 1% per day of the amount Bitconnect promises, as well as the guaranteed return amount. All Bitconnect loans are denominated in U.S. dollars, but must be traded in BCC, the platform’s native cryptocurrency.

Therefore, the loan user had to deposit Bitcoin into the platform, which was then exchanged for BCC at the market rate, after which BCC was issued on the Bitconnect loan software. Users would receive varying percentages of interest, depending on the amount of BCC they lent. Add to that the referral system seen in other Ponzi schemes, and the fact that it operated anonymously; it’s no surprise that the whole endeavor ended in tears.

Due to being involved in a Ponzi scheme, the virtual currency trading platform Bitconnect declared bankruptcy at the beginning of this year. Interestingly, in September 2017, American cartoonist Spike Trotman shared the most interesting and bizarre prediction cartoon, believing that Bitconnect is indeed a Ponzi scheme.

Conclusion

Bitcoin mining scams vary, from Vaporware, which uses nonexistent or useless hardware to defraud users; cloud-based Bitcoin mining, which offers shares in digital mining data centers and contracts that promise ongoing "returns"; to Robo Trading and HYIPs, which claim to use algorithms to "trade" behind the scenes while promising a specific daily gain. But investors with a little attention can easily identify the red flags in these scams, including: guaranteed earnings and return promises, specific percentages, rewards behind referrals or pyramid schemes, and a website that mimics the look, feel, and functionality of other proven scams.

Since the birth of Bitcoin in 2009, there have been numerous scams. Initially, these criminals took advantage of people's lack of understanding of the basic principles of digital currency and financial products to deceive users. However, as the cryptocurrency market grows and encryption technology improves, the frequency and sophistication of scams have increased. Today, new scams such as email traps, exchange scams, and Bitcoin savings and trust fund scams are emerging. The road to Bitcoin mining is still full of thorns, and investors still need to proceed with caution.