The Rise and Fall of Bitconnect

Top 20 cryptocurrency exchange BitConnect ceases all trading activity and shuts down on January 15th, 2018. One of the largest Bitcoin exchanges on the internet, BitConnect is also behind the token known as Bitconnect Coin, which dropped from roughly $360 to an all-time low of $19 after the exchange shut down.

What is Bitconnect?

Bitconnect was one of the largest, yet most suspicious cryptocurrency exchanges on the web for the longest time. Created by anonymous developers, the website started its activity by loaning out BCC, or Bitconnect Coin, an in-house token. They would also offer bonuses to people who could convince others to join the website and get a loan themselves. So far, it sounds like the simplest definition of a Ponzi scheme. However, Bitconnect offered a bit more than just loans.

The exchange claims that they have developed a unique volatility software – a bot that could somehow predict the changes in Bitcoin’s market price. Bitconnect would use the software to trade Bitconnect Coin for Bitcoin as the prices grew and dropped and would return the interest to the person who loaned the tokens. As the price of Bitcoin fluctuates a lot in a matter of hours, it’s fairly easy to understand that anyone who had access to a predicting software would get obscenely rich in an instant. However, the existence of such a software is questionable in the first place. Going back to the fact that the very developers of the Bitconnect website are anonymous, this kind of makes you wonder if the software ever existed at all.

Sure, there were some examples of real people who managed to withdraw some profits made through Bitconnect, but it is still unclear if the money came from the actual interest earned by the volatility software.

How does Bitconnect work?

Bitconnect users would have to purchase a number of BCC with Bitcoin or US dollars first. Then, they would have to loan the money back to the volatility software bot, where it would be locked away for a certain period of time (up to 299 days, depending on the value of the investment.) The interest could be accessed on a daily basis, and was, naturally, paid out in BCC. By the end of the loan period, the bot would also release the loan, leaving you with the initial amount of tokens plus the interest. However, that’s where a red flag starts to appear.

Have you heard of Bitconnect coin being accepted anywhere outside of this website? Probably not. That is because BCC was only accepted by a few major exchanges, and only when the company’s business was at its peak. Literally, the only place that ever traded BCC was the Bitconnect website – meaning your actual profit was at the mercy of the anonymous people behind the website. And that is precisely what happened on January 15th – the interest in Bitconnect dropped so much that there was no more real value to the token itself. This is another trait of a classic Ponzi scheme, which works fine as long as there are enough interest and money going around, but fails as soon as the interest starts to go down. The people who stayed with Bitconnect up until the very end ended up with thousands of BCC that were suddenly worth nothing.

Another red flag that was addressed in relation to Bitconnect was its affiliate program, which was a classic example of a pyramid scheme. People who would refer others to the website would get 5% of their investment, 3% of the second-tier referral’s investments, 2% of the third-tier referral’s investments, and so on. There were rumors that the first people to advertise Bitconnect (crypto YouTubers with a fairly large following) were in fact directly connected to the developers of the project, and got to withdraw a large amount of money before the popularity of the exchange started going down.

Bitconnect Coin has hit an all-time high of $463 in December 2017, only to drop to around $360 in the first days of 2018, and ultimately to $19 after the exchange ceased trading.

Why did Bitconnect shut down?

The scandal unleashed around January 15th, when the company started sending out emails invoking a number of excuses as to why they have to stop all trading activity. The first and probably most plausible one is the receiving of two Cease and Desist letters from the Texas States Securities Board and the North Carolina Secretary of State Securities Division. The email stated that these letters ‘have become a hindrance for the legal continuation of the platform’. Another excuse Bitconnect brought up is DDoS third-party attacks, which destabilized the website’s activity and created panic in the community. Lastly, they blamed it on the heaps of bad publicity circulating online, which made the community uneasy and less confident in Bitconnect’s network.

However, not all hope was lost for people owning Bitconnect Coin. The exchange claimed that they would unlock all the currently loaned BCC at an average price of $363.62, and allow people to withdraw them within five days from the exchange shutting down.

Where to now?

Despite ceasing all trading activities on their website, Bitconnect doesn’t seem to stop supporting its in-house cryptocurrency. They have announced an ICO for a new decentralized, blockchain-based cryptocurrency called Bitconnect X, and hope to reclaim a clean reputation in the year to come. However, it is still unclear if this ICO will attract the necessary support from people, considering the not-so-good reputation the company has already built for itself.

If there’s something we should all learn from the Bitconnect fiasco, it’s that we should be extra careful about where and how we invest our money. With so many beginners drawn into the niche at this point, it can be hard to tell the difference between an actually legit company and an elaborate Ponzi scheme. Perhaps it’s best to not risk your money on a token that is not accepted anywhere outside of the platform that developed it – especially if there is no real explanation of what backs up its value.


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