Episode 46: Crypto Craziness Part 3 - Satoshi Revealed, Pump and Dump Schemes, and BitConnect

This episode covers crypto scams and frauds, including pump and dump schemes, ICO exit scams, and the Ponzi/pyramid scheme BitConnect.

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Pump and Dump Schemes

To start with, we’re going to talk about pump and dump schemes in the traditional market and later get into the crypto variety. So: What is a pump and dump scheme? According to Investopedia,

Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme already have an established position in the company's stock and sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

One thing to keep in mind is that, the larger a stock, the harder it is to manipulate. This is because the number of people needed to buy into small-cap stock to pump its price is much smaller than that which would be needed to pump the price of a large-cap stock. So, basically, if you want to manipulate Disney’s stock, you have to be Warren Buffett. But if you want to manipulate the stock of the brand new, revolutionary, biotech company being run out of your cousin’s trailer park, you only have to be the Wolf of Wall Street. 

Investopedia notes that this method originated with cold calling. But thanks to the glory of the internet, now you can do it with memes, message boards, chat rooms, emails, videos, podcasts, blogs and all kinds of other great things!

Now, anybody listening to this part of our Crypto Craziness Series that’s also listened to the previous two episodes knows that cryptocurrency is very much a libertarian endeavor. And as we all know, there’s nothing more a libertarian hates than the government fucking with their financial schemes, such as insider trading. As Robert P. Murphy of the Mises Institute put it,

In a free society, there would be no such thing as laws against so-called insider trading.

The beauty of crypto-currency for libertarians the world over is that it is virtually unregulated. Insider trading, pyramid schemes, ponzi schemes, and all that other great stuff is just par for the course in this wild wild west! And that brings us to cryptocurrency pump and dumps. According to a study by the Social Science Research Network,

We identified 3,767 different pump signals advertised on Telegram and another 1,051 different pump signals advertised on Discord during a six-month period in 2018. The schemes promoted more than 300 cryptocurrencies. This comprehensive data provides the first measure of the scope of pump and dump schemes across cryptocurrencies and suggest that this phenomenon is widespread and often quite profitable.

Okay, so in the traditional stock market, you’ve got to keep your pump and dump scheme on the downlow. Otherwise, some pesky nerd from the SEC or the FBI might pay you a visit. But in the wild wild west of cryptocurrency, anybody can be a scammer from the comfort of their own home by simply anonymously signing into a chat room! The researchers of the SSRN paper identified three different types of pump and dumps. The first one is called “obvious pumps”. And this is my favorite kind of crypto pump and dump scheme because of how absolutely brazen it is, 

These channels used the words “pump” and “dump” everywhere, including in the name of their channels. They usually had only a few pump announcements, and they posted pump signals infrequently. They usually posted the first announcement between 24 to 48 hours before the pump. Then, they posted many other announcements about timing and the cryptocurrency exchange where the pump would occur. When the time of ipump came, they posted the name of the coin. They usually posted the pump results a few hours afterward, along with the date of the next pump.

These channels usually had premium membership plans as well. The premium membership was based on how many people a person had recruited to the channel. Users could also buy premium membership plans. Based on the type of plans, premium members would receive the pump signals a certain amount of time before others.

The other two identifiable types are the following:

  • Target pumps - This is essentially the same as the obvious variety, except they avoid being quite as obvious. So it’s a reasonably brazen pump and dump, but they’re a little more careful in how they use their language.

  • Copied Pumps - This is a group that copied the pump and dumps signals of others, although that’s usually not all that hard given that most of these groups are open and publicly accessible. However, some are private. And if one wanted to take their information and data to run your own pump and dump chat group, you’ve got to first infiltrate them.

Although pumps and dump groups typically target low-cap coins for the reasons I’ve already mentioned, Bitcoin itself isn’t an exception, despite having the largest market capitalization in the entire space by a mile. According to the study,

There were 6 pumps of bitcoin on Discord and 76 pumps of bitcoin on Telegram. While these pumps account for only 1.7% of all pumps, it is important to note that bitcoin is not immune from the pump and dump phenomenon.

I decided to do a little investigative reporting on one of these Telegram groups. I found one called Crypto Pump Island with 10,000 subscribers. By the way, I reported these guys on Telegram. And if you’ve got Telegram and you think being a total sociopath is not very cool, consider also reporting them! Anyway….Here’s an example of one of their posts:

Next pump scheduled! Friday July 26, 2019 at 6pm Greenwich Mean Time. Exchange: Binance. This pump is going to be huge. Don’t miss it! Last pump result: SNT (or Status) Coin. Quick profit: 21.6%. To know coin name earlier join premium.

So, at first I was really confused about which coin they planned to pump. Based on the ambiguous wording of the post, I wasn’t sure if they meant that the pump and dump was going to be Status and they were just showing the stats for the last time they pumped it, or if they meant that the last coin they pumped was Status and were just flaunting the 21% in profits to boost their street cred and rope you in for a “premium membership”.

It didn’t look like Status was the last coin they pumped, which appeared to be MATIC, and so I figured it had to be Status that they going to pump.I was wrong. True to the SSRN study, the next day they posted the coin just as they began the pump. It wasn’t Status. It was (ADX) or AdEx. And indeed they made a handsome 7.4% profit. 

Government regulators at the moment aren’t doing much, if anything, about this. So, are there any private solutions? NASDAQ INC claims they can solve the problem of pump and dumps. According to Bloomberg,

In a paper released Thursday, the company said it has spent decades developing tools to police securities, currencies and other markets, and can use them to stamp out manipulation and other scams besieging digital coins.

They have an excerpt from the paper, 

Regulators, brokers and exchanges have surveillance teams that monitor activity constantly and advanced technologies to help capture and analyze abusive behaviors including pump-and-dump schemes, insider trading, wash trading as well as spoofing and layering.

You might be wondering if any crypto exchanges have this technology. Some, but not many! In fact, one crypto exchange which does not utilize NASDAQ’s tool is Binance. And it just so happens that Binance is the exchange of choice from our friends at Crypto Pump Island.

So, what’s the big deal about this Binance Exchange. It’s probably just a few nerds in chat rooms dumping on other nerds in chat rooms, right? Not exactly. According to binance.com’s “About Us” section, they keep it super real and super concise,

Beyond operating the world's leading cryptocurrency exchange, Binance spans an entire ecosystem.

And by the way, Binance is not lying. And here’s where things get really terrifying. According to crypto data tracking site nomics.com, a year-to-date look at the top crypto exchanges reveals that Binance is by far the biggest exchange in all of crypto. A staggering 57% of all crypto trades happen there. It has 544 trading pairs, which is 458 more than the next largest exchange, 7.69% of all trading volume (which at the time of writing represents nearly 278 billion dollars), and over 680 million trades made so far in 2019.

So, THIS is Crypto Pump Island’s playground of choice. And yet, if the success of Crypto Pump Island is any indication, Binance has done nothing to stop this.Which begs the question: what exchange, or exchanges, are doing their best at taking proactive steps against pump and dumps? Sadly, it’s run by those that will be among the first to die during the bitcoin apocalypse, at least according to the bitcoin time traveler. And that is the Winklevoss Twins. 

The Winklevosses twins, as we know, made a fortune from investing in bitcoin since 2012. And now they run an exchange called Gemini. According to Investopedia,

Gemini will reportedly be the first digital currency exchange to make use of Nasdaq's SMARTS Market Surveillance Technology.

Well, that’s good! And it’s not the only good thing Gemini is doing, 

Earlier this year, the Winklevoss brothers also revealed plans to launch a Virtual Commodity Association, a self-regulating organization for digital currency markets that also aims toward efficiency and transparency. While the proposed plan has yet to take effect, it was met with a cautious welcome by many in the digital currency space. Supporters believe that an organization of this type would help to maintain innovation in the cryptocurrency space while also facilitating issues of liquidity and pricing, among other things.

Well that’s cool, right!? And, as I’m told by libertarian voluntaryists, the free market rewards good and honest businesses while punishing bad and dishonest businesses. So Gemini should be almost neck and neck with Binance at this point I’d imagine, given that Binance is a apparently a schemer’s paradise and the Gemini exchange is creating a safe and fair ecosystem for traders solely through private, free market mechanisms, right? 

Well, let’s take a look at nomics.com and see how Gemini ranks: Tenth place. With a meager 0.14% of all trading volume, less than 1% of all trades in the space, and only 15 trading pairs. The CEO of Binance, Chanpeng Zhao, who usually goes by just CZ, happens to be as rich, if not more so, than each of the Winklevoss Twins. Forbes estimates his net worth to be 1.1 billion AT LEAST, whereas each Winklevoss twin is worth 1.1 billion AT MOST. And this is despite CZ getting into the crypto game way later than the twins. In fact, it took the twins since 2012 to accumulate that much money, whereas CZ did it in only six months! (And by the way, that Forbes article was from February of 2018, so God only knows how much money he has now). 

Exit Scams

If pump and dumps weren’t bad enough, there’s a wonderful little thing called the ICO exit scam. ICO stands for “Initial Coin Offering”, which is essentially the same thing as an initial public offering in the stock market except, by calling it a “utility token”, or whatever such nonsense, a company can avoid SEC regulations and issue unregistered securities, er, I mean, “utility tokens”.

One reason that security laws exist is to protect investors from pouring their money into a so-called business when, in fact, it’s simply a front for unscrupulous people to take your money and run. 

So, here’s the thing: Libertarians tell me that the pesky SEC and FBI only get in the way of financial progress. After telling you all about these exit scams, I’ll let you be the judge as to whether or not deregulation of all finance is a good idea. According to Cryptovest,

The year 2018 had a large number of ICOs, most of whom raised a lot of money during the first six months before the trend slowed down. However, despite the trend reversal, most projects managed to raise significant amounts of Ethereum (ETH) only with a whitepaper and vague promises.

Roughly $7.8 billion was raised during the period, and some founders decided to take off with the money instead of delivering on their promises.

Cryptovest gives five examples of these.

Exit Scam Number 1. Centra Tech

This ICO apparently partnered with VISA and Mastercard and was actually endorsed by Floyd Mayweather and DJ Khaled, who were brought in to testify about their involvement. The globalists at the New York Times report,

The Securities and Exchange Commission said Mr. Mayweather was paid $100,000 and Mr. Khaled $50,000 to promote a virtual currency released last year by the start-up Centra Tech in a so-called initial coin offering. The men did not disclose those payments in their online postings hyping the digital coin, the regulators said.

In fact, it was the New York Times which exposed Centra Tech in the first place. It didn’t end well for the scammers. Three of Centra Tech’s co-founders were arrested, including one who was taken down as he was trying to flee the United States.

Exit Scam Number 2. BlockBroker

This might be my favorite ICO exit scam because the stated mission of the ICO was to stop IO fraud! As Coin Central reports,

As if in harrowing parody of itself, Block Broker just subjected its investors to the very thing it swore to prevent. The ICO, which claimed to be building a platform to prevent investors from buying into exit scams, just pulled an exit scam of its own

One look at the Block Broker whitepaper unravels a tale of unscrupulous intent. It contains little technical substance, is ridden with grammatical errors, and talks more about the token sale than the project’s function. Even so, the ICO accrued just over $3mln in funding during its lifespan, as the warning signs were not enough to dissuade every purveyor.

I do want to note conflicting information: other sources I have read said $300,000, not $3 million, just for the record.

Of these warning signs that Coin Central lists, my favorite is the fact that a huge percentage of the Block Broker ERC20 tokens went to a single address. Indeed, thanks to the miracle of the public blockchain, you can check out the Ethereum address linked through our website at nonedarecallitordinary.com that shows a staggering $221,673,500 tokens of the $750,000,000 total supply.

Exit Scam Number 3. Prodeum 

This was basically the crypto of choice for our Idiocracy social media zero attention span world. What was this crypto promising? Who the fuck knows. Something about tracking fruits and vegetables on the Ethereum blockchain, but mostly it was all about posting memes on Instagram. CryptoInvest reports,

The project had a curious taste for influencer publicity, making social media users write “Prodeum” on their bodies, or post a picture holding a banana. Then the project wiped out its site and all related social media, including its white paper. Notoriously, the project site was deleted and replaced with the word “penis”.

Exit Scam Number 4. Loop X

Loop X was supposed to be a crypto lending platform that promised too-good-to-be-true returns on investment in perpetuity. However, after raising 4.5 million dollars worth of Bitcoin and Ethereum, they simply vanished into thin air, deleting all evidence of their existence on the web. However, they’ve left a few of their traces behind. The Next Web reports,

 According to a cached version of its now-purged website, investors pledged a total of 276 Bitcoin and 2,446 Ethereum into the fraudulent initial coin offering over five separate token sales in January 2018.

After developing over months and testing successfully with great profits, we can release now with great confidence the LoopX [t]rading [a]lgorithm,...This [s]oftware will give us all the opportunity to make more money online then we could ever do in real life.

Our software handles over 10,000 trades per second and calculates over 100 currencies at a time… Always looking for those opportunities to make profits bigger then [SIC] 10%, which will payed out [SIC] to our members on a weekly basis.

Finally the opportunity is here for the common investor to be part of a revolution and be finally free, financially free… Our top priority is to give you an opportunity to sit back, let us do the work and watch your money grow.

As The Next Web notes, this site sounds a lot like the infamous Bitconnect ponzi/pyramid scheme that Dylan will go into later. Except, unlike Bitconnect, not only did they scam people into funding a clearly scammy project, but they even scammed them into thinking they had any intention in going through with the scam. 

Last but not least, Number 5, PureBit

PureBit is kinda a post-hoc exit scam. It was a start-up promising to be a ground-breaking crypto exchange. But because the exchange went up just as crypto entered the last bear market, they weren’t very successful upon launching, dicked around for only a few days, and, because they didn’t want to deal with the headache of a downward market, basically said “fuck this” and pulled the plug. To their (half) credit, they have been issuing Ethereum refunds to at least some of their investors, but only at 50% So, I guess this is a half-exit scam. 


How it was supposed to work

According to BitConnect’s “Investing in BitConnect Lending” page, it was supposed to work like this: First, you deposit your bitcoins in a special wallet. Then you use those bitcoins to buy BitConnect Coins (BCC). Then you “invest” some or all of your BCC. The BitConnect “volatility software” does a bunch of smart things to make money on the bitcoin. Based on how much money you invested, you receive interest (accrued daily) after a certain period of time. Let’s assume one BCC is worth $100. If you invest 1 BCC, you can earn up to 40% per month and get your money back in 299 days, or around 10 months. Assuming 40% every month, you would end up with 500 dollars after 10 months. To get a sense of how insane those returns are, Bernie Madoff, creator of the greatest Ponzi scheme of all time, only promised 1% returns a month. Investing over 1000 dollars also nets daily bonuses, from .1% to .25%. Plus, all these interest payments are paid daily in USD. 

TheNextWeb also appears to misunderstand how BitConnect works. On the basis of 1% daily interest, they say that 1000 would become 50 million in three years. But the daily interest is paid out daily and is not itself invested. So over three years you would get you 11950. (1% of 1,000 is 10, so you would get 10 a day for 3 years which is 10,950 total). The Motley Fool makes another common mistake: they claim that interest and return principal was paid out in BCC but only the return principal was; all daily interest payments were in dollars. 

This isn’t to say it ISN’T a scam, just that TheNextWeb is incorrectly showing how it is a scam. A better example is that if you invest a mere 10,000, you would earn 3000 a month. That means that basically everyone just needs to save 10,000 and you are set for life.

Early flourishing and early signs of trouble

According to CoinMarketCap, it was one of the best performing cryptos of 2017, with a market cap of over $2.6 billion and a value of over $400. It was in the top 20 by market share. But not everyone was impressed. Ethereum founder Vitalik Buterin himself tweeted that,

If [one percent per day] is what they offer then that’s a [P]onzi scheme.

Aside from a ponzi scheme; there were also signs BitConnect was running a pyramid scheme as well. Excuse me, I mean a “multi-level affiliate marketing” program. “Affiliates” would tout BCC on their social media profiles and YouTube videos, and get commissions for everyone they convinced to become an investor. One tactic was to show how much money they made, not mentioning that most of it was getting people into the program, not through investment returns. @BCCPonzi shows a screenshot of affiliate @CryptoNickk hocking BCC on a video. While he has made about 900,000 through BitConnect, over 800,000 of that is from the affiliate program ie getting more people into the pyramid scheme. There is even a picture from BitConnect showing how their affiliate program works that is shaped in a pyramid. 

Eventually, the authorities got suspicious

In November 2018, the UK Companies House issued a notice that BitConnect LTD would be dissolved “unless cause is shown to the contrary” in two months. All of BitConnect LTD’s assets would then belong to the crown. BitConnect pushed the narrative that this only affected BITCONNECT LTD, and wouldn’t affect their main registration, BITCONNECT INTERNATIONAL PLC.

This is where it gets weird. Besides BITCONNECT LTD, BitConnect is also listed in the Companies House registrar as BITCONNECT INTERNATIONAL PLC. There is also a third listing as BITCOIN AMR LIMITED, which used to be listed as BITCONNECT PUBLIC LIMITED, which is NOT the same as BITCONNECT LTD. All three are registered under different company numbers, confirming that according to the register they are three different entities. But there are some similar personnel between these companies. 

Le Thi Thannh (TANG) Huy is a director of both BITCOIN AMR LIMITED and BITCONNECT INTERNATIONAL PLC. But this person is listed as having two different birth years, 1978 and 1984 respectively. And while they both live on the same street, different street numbers are associated with each, one on 13 Rutland Road and the other on 36 Rutland Road. 

They also both feature Mr. Santoso as a director. BITCOIN AMR LIMITED does not list a first name, says he was born in 1981, and lives on 36 Great Bushey Drive. BITCOIN INTERNATIONAL PLC says a Wardah Santoso was born in 1983 and lives on 27 Great Bushey Drive. 

The Meme

This negative attention didn’t stop BitConnect from hosting an event in Thailand that would become a notorious meme. Now, the video is, of course, hilarious. But the most important are the financial benefits that Carlos Matos hypes in between shouting BitConnect and acting like a dufus:

I started 137 days ago with only $25,610 and right now I am reaching $140,000… I am actually earning around $1,400 on an everyday basis, seven days a week.

This is classic pyramid scheme behavior: bring on someone who got lucky (or is a high-level affiliate) to tout their big earnings while not having to say them oneself. And if you want MORE Carlos Matos, you can checkout his YouTube channel where it appears he has gone full breatharian.

More Trouble With The Authorities

Things got worse on January 4, 2018, when the Texas Securities Commissioners issued a cease and desist order to BitConnect to halt the distribution of BCC until it is registered as a security or offered an exemption to being so registered. They got another cease and desist order on January 9, 2018 from the North Carolina Securities Division. “Affiliates” began claiming that they had never backed BitConnect, and started scrubbing their youtube channels and social media profiles of all mentions of the scam. 

Google News Hijinks

But BitConnect had one last trick up its sleeve: gaming the Google News Algorithm. BitConnect had its own news site that produced so many articles it was treated by Google as a “legitimate” news source. This meant that it could get a spot on Google’s news carousel. So while other actually legitimate news sites were reporting on BitConnect’s shenanigans, they were being hidden behind the flood of articles on BitConnect produced by BitConnect themselves. 


But then all things must fall, eventually. On January 16th, 2018, BitConnect announced it was closing the lending and exchange portion of its business. They laid the blame on “bad press”, although the cease and desist orders and DDoS attacks didn’t help. As a result, they released all outstanding loans, returning the principle on the loan in BitConnect Coin at 362.62 dollars per BCC, the average price of BCC over the previous 15 days. Of course, this didn’t bode well for the value of BCC. BCC crashed to 19.28. This is after starting at .15 on January 20th, 2017 and reaching a high of 479.30 on Dec. 28, 2017

As you can imagine, investors did not take this well. A flurry of activity was seen on the BitConnect subreddit.

This cant be it. I lost everything. EVERYTHING.

Another post ominously tried to console fellow investors with the title.

800-273-8255 is the Suicide Hotline. Money Isn’t everything. Your life still matters after all of this

To get a sense of just how popular BitConnect was, keep in mind that their website was translated into Vietnamese, South Korean, Indian, Indonesian, Japanese, Thai, Cambodian, and Filipino. A lot of people across the globe lost money. 

So, what now?

According to BitConnect’s press release (or at least Motely Fool’s reading of it; the site is no longer available) BitConnect.co had no intentions of closing down, transitioning simply to a wallet service. They also planned on going with their BitConnect X ICO later that month. Sadly, it appears even these toned down plans have gone awry. A quick check on BitConnect X reveals that it is held by 46 wallets, one of which holds 245,000,000,000,000,000 (245 Quadrillion). BitConnect.co also is no more, instead linking to the website of Dr. Rasya Dixit, an Indian cosmetic dermatologist. 

Arrest and the India Connection

According to Fortune, Divyesh Darji, who is either head of BitConnect’s Asia operations or just at the top of the non-pyramid scheme in the Asian markets, was arrested in India after flying into New Dehli from Dubai in the United Arab Emirates. Why would India be so interested in BitConnect? Apparently BitConnect has a special and infamous Indian connection.

It appears to start in November 2016, when Indian prime minister Narendra Modi sought to invalidate higher-value banknotes as a way to curb tax evasion. He gave holders of these notes 60 days to cash them in or they would become useless. As a result, people took to Google, which noted a large increase in searches for phrases like “how to launder untaxed cash” or “black money”. It turns out that cryptocurrencies are a way to do this, and Indians looking to clean up dirty money were willing to pay 25% premiums for Bitcoin. Strangely enough, BitConnect started right after Modi’s announcement. Weird. So, a lot of BitConnect investors were Indians looking to hide from tax authorities, so they couldn’t exactly go to the authorities to let them know their illegal tax haven scammed them. They thus chose a more direct path to getting their money back.

Shailesh Bhatt, Kirit Paladiya, and eight co-conspirators kidnapped two BitConnect representatives in Surat, a city in the Indian state of Gujarat. They demanded 2,256 bitcoins as ransom to recoup their BitConnect losses. But Paladiya wasn’t satisfied. He got in touch with his uncle, Nalin Kotadiya, a former politician with Bharatiya Janata Party, Modi’s party. Using his connections with local police, Paladiya double-crossed Bhatt to extort his bitcoin. After all, Bhatt wouldn’t be able to go to the authorities. Again, cops don’t really appreciate requests to get back the money you stole in the first place.

But Bhatt did just that. He went to the Home Minister in Gujarat, Modi’s home state, and told them he was kidnapped by the police and forced to pay 200 bitcoin, worth 1.8 million dollars. Bhatt’s charges eventually led to Indian investigation into the whole matter, and they eventually learned that everyone involved was a piece of shit. We also get this beautiful sentence for some reason,

Bhatt himself has gone “underground” -- Indian parlance for hiding to avoid arrest...

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