What Investors Can Learn From The Most Infamous Bitcoin Scam in History

Details on the Bitclub Network Scam

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In December 2019, five men — Matthew Brent Goettsche, Russ Albert Medlin, Jobadiah Sinclair Weeks, Silviu Catalin Balaci and Joseph Frank Abel — were detained and charged with conspiracy to commit wire fraud and to offer and sell unregistered securities in connection with their work on BitClub Network. 

The BitClub Network, billed to investors as a network that allowed individuals to invest in and profit off of large-scale bitcoin mining operations, turned out to be what is likely the largest scam in the history of Bitcoin so far.

While the five ringleaders behind the scam were caught by U.S. officials, the scam is likely to have a lasting impact on the cryptocurrency space.

This is how the scam worked, how the scammers were caught and what investors need to know about what is likely the most infamous bitcoin scam in the currency’s short history.

The BitClub Network Scam

The BitClub Network (or BCN), founded in 2014, was an early bitcoin mining network. From its founding up until 2019, when the project was shut down, promoters of BitClub Network advertised shares of cryptocurrency mining pools — collections of high-powered computer hardware that “mined” cryptocurrencies.

Investors who purchased these shares were promised a guaranteed cut of the bitcoin generated by the pool. Higher pool tiers, which required a larger per-share investment, offered higher potential payouts.

The cost of joining in on BCN was steep. Before you could invest in any pool, you would need to pay a $99 joining fee. Then, you could start buying shares in pools. The cheapest shares started at $500. Investors wanting to go all-in could buy pool shares that cost as much as $2000 each.

There was no upper limit to how much you could put into the project. Some investors spent as much as $60,000 on shares.

After 30 days, in theory, you could start to withdraw earnings from the mining pool or pools that you’d invested in.

There was also a multi-level marketing aspect to the scheme. Investors could receive additional rewards for recruiting other investors into the network.

From an outside perspective, the Network did seem like it could be legitimate. There are legitimate bitcoin-mining pools, which pay investors who purchase shares modest dividends from mining profits.

However, the BCN’s owners didn’t intend to make good on those investments — at least, not in the long run. 

Instead, the goal was to draw in investors by overpromising on rate of return, then pay them just enough to placate them if they complained. Early investors would receive big payouts as a way to drum up enthusiasm and spur word-of-mouth marketing. 

As with most Ponzi schemes, payouts to investors would primarily be financed by revenue from shares purchased by other investors. 

The owners of the BCN never intended to make the bulk of the Network’s money from bitcoin mining. According to an IRS press release on the case, Balaci and Goettsche referred to the investors as “sheep,” and said they planned to build “this whole model on the backs of idiots.”

Keeping Bitclub Network Running

As with any Ponzi scheme, so long as only a few investors at a time withdrew their “earnings,” Bitclub Network would be able to pay out. The Network would have a surface-level appearance of legitimacy — at least, until it secured enough cash. Then, the founders would take the money and run.

To draw in investors, the Network’s promoters used a range of underhanded advertising strategies. 

For example, various BitClub promoters used misleading or outright inaccurate figures to make the pools seem like better investments than they really were. As the scheme went on, these promises became increasingly outlandish, with promoters offering investors a rate of return on investment that would have been impossible to achieve, even with the most powerful bitcoin mining rigs in existence.

At the same time, promoters traveled across the U.S. and around the world to give presentations on the Network, intended to lure in more investors with promises of major growth and guaranteed return on investment.

To keep the scam hidden from financial regulators, the Network’s managers never registered their mining pool shares with the U.S. Securities and Exchange commission.

One promoter also encouraged U.S.-based investors to use a virtual private network (or VPN) to hide their IP addresses when doing business with the Network. This would help to hide investor activity from U.S. officials, like those at the SEC.

The End of Bitclub Network

Ultimately, federal investigators uncovered the scheme and secured a trove of communications between BCN managers that laid out how the scam was run. 

In total, the Network collected around $722 million in bitcoin during the course of the scheme. By the time it was shut down, BCN was a near-billion-dollar company.

Now, the website for the project is down, and the BCN social media accounts have remained untouched since 2019.

It’s not clear where the money from defrauded investors has gone. Federal authorities have not ordered the scheme organizers to repay investors yet, and there is a possibility that the money may never be recovered.

As of January 2021, three of the co-defendants, Jobadiah Sinclair Weeks, Silviu Balaci and Joseph Abel, have pleaded guilty. Sentencing for those defendants is scheduled for early 2021, with the exception of Balaci, whose sentencing date remains to be declared. The rest, Goettsche and Medlin, are detained and awaiting trial.

For victims wanting to provide information to the FBI, the agency has drafted a questionnaire, which includes fields for information on money paid to the BCN owners, presentations attended, and refunds requested.

For victims that hadn’t reported purchased or invested bitcoin, filling out this questionnaire likely wouldn’t be self-incriminating, unless they were one of the few investors who received a payout from the Network. 

The IRS only requires that you file taxes on bitcoin at time of mining, when sold, or when received as payment for goods or services. If you invested and never received a payout from Bitclub Network, you shouldn’t have had to declare income.

How the BitClub Network Scam Compares to Other Schemes

The BitClub Network scandal isn’t the first scam in cryptocurrency history. Igot.com, Mt. Gox, and Bittrex are all high-profile examples of exchange networks and other programs that were involved, at least in part, in scamming investors or creditors out of millions of dollars.

The Bitclub Network Scam also wasn’t the first or only bitcoin-mining Ponzi scheme to defraud crypto investors. 

USI Tech, a Dubai-based crypto mining operation, stole investor money by similarly promising unrealistic returns on mining pool share. 

The specifics of the USI scheme were a little different. Unlike BCN, USI Tech claimed it was able to offer ultra-high returns on investment due to cutting-edge bitcoin mining tech located in an underground vault in Iceland. The project also seemed to be paying out actual dividends before the scheme’s owners began giving investors the run-around. 

The owners of USI Tech were also able to drag out the scheme by rebranding several times before being shut down, updating the scheme’s name whenever the new brand was served cease and desist notices by major financial regulators.

USI Tech’s multi-level marketing tactics, however, were similar to those used by the owners of the BCN scam. 

The BCN scam, however, is likely the largest crypto scam to date, and one of the longest-running schemes in the history of cryptocurrency. The BCN scam, which lasted for five years, was around for nearly half the life of bitcoin at the time.

The total money lost isn’t much compared to high-profile scams from outside the cryptocurrency space. The Bernie Madoff investment ponzi scheme, for example, went on for decades and siphoned more than $65 billion from investors. However, the newness of Bitcoin and the relatively small size of the crypto market means the scam may have a similar impact in the long-run.

So far, it seems like there hasn’t been a similar ripple effect, however. Investors aren’t pulling out of crypto projects en masse or turning away from existing bitcoin mining pool operations. If the BCN scam will have a long-term impact on how investors choose crypto investments, it’s not clear what kind of impact it will have just yet.

What Investors Should Learn From the BCN Scheme

For investors and cryptocurrency enthusiasts, the Bitclub Network scam makes a few things clear.

First, the crypto market isn’t wholly unregulated, despite its reputation. The U.S. government is actively involved in the regulation of cryptocurrencies and the prosecution of scammers. Future scams may face the same level of scrutiny as BitClub. There are protections for consumers, although they may come too late for those who invest in fraudulent projects.

However, the growing amount of money in the crypto market and number of past Bitcoin scams likely means that the BitClub Network scheme wasn’t a one-off event.

The continued existence of other Ponzi schemes — like the USI Tech scam, which was never formally shut down by regulators — also means that regulating bodies may not always be able to come to the rescue of investors. Also, even if regulators are able to shut down a scheme, investors aren’t guaranteed the return of their money. Those defrauded by future scammers may be completely out of luck.

It’s possible that scammers could attempt the same scheme in the future — though the failure of BitClub Network and other scams may dissuade some would-be ponzi schemes. 

Investors, as in any market, should be wary of investment schemes that look too good to be true. They should also be aware of the common investment scam red flags — like unlicensed professionals, promises of significant or “guaranteed” return or additional payment for bringing other investors on board the scheme.

Familiarizing yourself with other common scams may also help you avoid fraudulent projects. For example, at the height of the COVID-19 pandemic, scammers impersonated respected institutions, like the CDC or WHO, to steal information and money from individuals.

Future scammers in the crypto space could impersonate well-known institutions to defraud investors.

Following the lead of other investors could be dangerous, but it may be a good idea to prioritize investment in reputable projects or limit yourself to investigating in large exchanges with a clean record.

Large, well-respected exchanges in the crypto space, like Binance and Coinbase, aren’t likely to be fraudulent. However, some customers of these exchanges have complained to the SEC of potentially fraudulent practices in the past. 

It’s likely that, no matter which project you choose to invest in, there will be some level of risk involved.

The Future of Cryptocurrency for Investors

At the time of this article’s writing, Bitcoin prices are closing in on $40,000, a little less than two weeks after coin prices surged past $30,000.

There is a massive amount of money invested in the crypto space, and more money is flowing in all the time. While some of this money is coming from individuals, institutional investors — who, in recent years, have started to see the space as a more reliable investment — are increasingly investing in crypto as well.

The continuing influx of capital into the crypto space may mean a few different things. The growing value of the space could inspire greater scrutiny from regulators, as well as new regulations and laws regarding the sale and transfer of cryptocurrencies. 

The money could also mean a new wave of cryptocurrency scams. 

The amount of money that the BCN owners were able to scam suggests that these types of schemes can be wildly profitable. While some would-be scammers may be discouraged by the charges brought against the BCN owners, the millions they were able to steal before being caught could inspire others to develop new schemes.

As with those who invested in the Bitclub Network Scandal, investors would likely have little or no recourse if their money is stolen by one of the scams in the future.Knowledge of the Bitclub Network scandal and similar scams will likely be essential, well into the future. For investors wanting to keep themselves safe, awareness of previous crypto scandals could help them spot red flags in future schemes.

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