Reports out of Hong Kong indicate that the MyCoin Exchange has just closed, locking out more than three thousand large investors. The closure has occurred almost one year to the day after the world’s largest Bitcoin exchange, Mt. Gox, closed off all exchange withdrawals on February 7th, 2014. That took almost 750,000 investor’s Bitcoins with it, plus 100k of the exchange’s cache. This sudden exchange closure has a potential combined value of three billion Hong Kong Dollars, which is equivalent to about $387 Million USD.
The investors affected would file reports on Wednesday with authorities in Hong Kong because deception was involved in a pyramid-style Ponzi scheme perpetuate by the exchange owners, packaged and sold as a bitcoin trading exchange.
The HK$3 billion figure is based on an earlier statement by the company that it had 3,000 clients in Hong Kong, each investing an average HK$1 million.
“No one seems to know who is behind this,” said Ms. Lau, an investor who claims she saw her HK$1.3 million investment, about $167k in USD, evaporate within four MyCoin contracts. “Everyone says they too are victims. We were told by those at higher tiers [of the scheme] that we can get our money back if we find more new clients.”
Outside of an online trading account with MyCoin, clients were given no written document or receipt as proof. Investors say they were lured by promises of making an HK$1 million return on an HK $400,000 Bitcoin contract investment within four months, which would produce 90 bitcoins at maturity. Mercedes-Benz cars or monetary prizes were promised investors who attracted more investors into MyCoin’s program.
Many facets of modern society were also in on this. Lau said clients were talked into buying contracts by real estate agents, law firm clerks or insurance agents. Lau said a law firm clerk opened an account in her name, without her approval, after receiving a check from Lau’s family members.
“I shouldn’t have been greedy. I was told by my real estate agent that the profit would be over HK$2 million after one year,” another investor, 81-year old Mrs. Chan said. She recovered only HK$1.2 million on her HK$3 million investment in seven different MyCoin contracts.
MyCoin clients are said to have lost as much as HK$50 million each, as some mortgaged their properties to invest in MyCoin. Sign of the Ponzi scheme crumbling began last December, as the company changed its trading rules. Investors were not permitted to exchange all their bitcoins for cash unless they manage to find more clients. Also, MyCoin did not pay according to the full Bitcoin price. MyCoin valued it at low as only HK$20 per BTC, compared to the current global Bitcoin price of around HK$1,770 (US$227) yesterday.
Last month, the company posted a notice at its office in Tsim Sha Tsui saying it would be closed for “Renovation” from January 3. The front door has been blocked by a wooden plank.
Mt. Gox had many similarities, with exchange prices differing from global prices, but not anywhere near this extreme. Also precursors to the closure were broadcast throughout the industry, and no written contracts were exchanged for the investments, regardless of size.
This was much more clearly a Ponzi scheme than Mt. Gox, which has yet to reach any real resolution of concrete findings to date. The prizes for recruitment, the level of investment per account, handling only about three thousand investors, and the deception in BTC pricing are all serious red flags. Tying in real estate agents, lawyers, and other professionals is a unique spin on the pyramid.
“Buyer beware” is what should have been learned from Mt. Gox., which could have been a larger pyramid with many smaller investors, but was most likely a tornado of mismanagement by Mark Karpeles. Given the fact that Mt. Gox was just last year, and these fairly wealthy investors learned nothing from that is startling. Fiat currencies, any valuable commodity has had their share of pyramids and scams throughout history, so this is far from endemic to Bitcoin. The problem is the size of this scam doubles-down on the negative image portrayed upon Bitcoin, when it actually has very little to do with Bitcoin.
Bitcoin is the brand name tarnished to accomplish MyCoin management’s objectives. These accounts were outside of the Bitcoin Block Chain, and who knows if the investors ever had any Bitcoin at all, at $20 values, the level of deception was extensive. And the ignorance of investors bordered on epic. They handed millions of Hong Kong Dollars to unknown parties, without written contracts, and without knowing the current value of Bitcoin. Plus, without any manner in which to protect their investment via private keys, Block chain, or any multi-sig protections.
Desperate digital currency critics will jump to see this as an issue brought on by Bitcoin itself, but Bitcoin was definitely not the culprit here. A fool and his money are easily parted, and not only were thousands of fools met, they were influenced by a spider webs of local professionals that were in on the scam to some extent. Mt. Gox was in effect a bank closure, without the banking regulation or Block Chain security. MyCoin is simply a Ponzi scheme, Hong Kong style. And with no name available to take responsibility, it falls to Bitcoin itself, by default. This is Bitcoin’s fault as much as it is the city of Hong Kong’s fault. It happened within Hong Kong, so blame Hong Kong, and tarnish it’s name, too. The critic’s logic would have to be that flawed.
Anyone who gives their Bitcoins, private keys, and/or hundreds of thousands of dollars to a third party without getting names, written contracts, insurance, etc. deserves exactly what they get. Those who fail to learn from history are doomed to repeat it.
My advice is avoid using exchanges for anything over $1000 USD, or any amount you are prepared to lose until you can get extensive protections and exchange ownership details. The exchange market is just as volatile as the currency values, with many recent sudden closures, so buyer beware.
Images provided by Wikimedia.commons
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