Sunday, August 31, 2014

Scam Alert: Bitcoin as disguise for Ponzi scheme

EDITOR'S NOTE: I counted the difficulty wrong. It's FAR MORE HOPELESS than I ever imagined. See revision throughout the last half of the article.

In the past 6 or so months there has been a plethora of suspect Ponzi schemes that involves Bitcoin as its disguise. Some of them are basically pure HYIPs (BitClub Network, Bitcoin Zones), while others are existing schemes that decided to incorporate Bitcoin as part of its various schemes (GetEasy, Paymony) Here's description from one of them:
XXXXXXX costs $99 for your membership. 
You can then buy shares in their three mining pools for $500; $1,000; and $2,000 per share respectively. 
Every share you purchase will pay you daily payouts for 1,000 days.
This, gentleman, is an unregistered security, as defined by US law known as the Howey Test.

A security in the US is defined as:

  1. investment of money due to
  2. an expectation of profits arising from
  3. a common enterprise
  4. which depends solely on the efforts of a promoter or third party

You "buy shares", you expect "payouts", you buy into "pool" which is obviously a "common enterprise", and payout solely depends on some unknown "mining pool".

This is OBVIOUSLY an investment security, and it's ILLEGAL to offer in the US of A.

"Now wait a minute", I hear you ask... "Are you telling me Bitcoin mining is illegal?"

NO! You see, in a *typical* bitcoin mining operation, you contribute CPU POWER ONLY (think of it as labor or material), not actual money. For example, this is how you join the BitMinter pool:
1. Register
2.  start bitminter clientBitminter client: Hit the start button to start Bitminter client. You get bitcoins for the work it does. Works on Windows, Linux and Mac. Requires updated Java. Other clients: bfgminer, cgminer, etc. Connect to the pool at stratum+tcp:// As user name put your Bitminter user name, an underscore, then a worker name, e.g. DrHaribo_asic3. In case you have firewall issues, port 443 and 5050 (Stratum) are also available. There is no password check, any password is accepted.
3. Get a wallet to transfer your coins to. Make sure you secure your wallet.
Other actual MINING pools are the same: you join by contributing CPU / processing power, NOT actual money.

In fact, you can join one now, using your regular desktop PC. It won't do much compared to dedicated hardware that costs THOUSANDS of dollars, but you can do it for FREE (and your payout will be negligible).

Ah, but you say, but *maybe* they really are buying the hardware to do the mining with the money you gave them?

Then it'd be a stupid investment, and I'll explain to you why by crunching some numbers.

Let's take an example... That bull**** offer above... They allow you to buy into the pool in $500, $1000, or $2000 chunks. How much is the ROI? Good question.  They haven't revealed it. Let's do it for real now...

Currently, the best hardware for Bitcoin mining seem to be AntMiner S3+ (-B8) which costs... 0.58 BTC, and guarantees speed of 453 GH/s (some will go up to 500 but not guaranteed).

Current Bitcoin value as of this post is 499 USD, let's just call it $500. So 0.58 BTC is $289. Let's round it up... 7 of these AntMiner S3+'s, total processing throughput of 3.15 TeraHashes, or 3150 GH/s, okay?

But how much Bitcoin will you mine with that much power? According to BitcoinX chart...

That's how much money 1 GH/s is expected to generate in 24 hours... 0.01074 dollars. Just over a penny, and it's FALLING.

So 3150 GH/s will generate... $33.83 a day... and it'll be less every day.

Wait! We haven't counted electricity yet.

How much is average electricity in the US? According to Energy Information Agency (US Department of Energy), the average US cost is 0.1314 cents per kilowatt hours.

Okay, how much power does one of these AntMiner S3+ ? They said it's 355 Watt at the wall.

So 355*7*24 = That's about 60 kilowatts a day (dang) or about $8 dollars.

Wait, the profit is $33 a day, wow, 1/4 of the potential is eaten by electricity alone, and this is one of the MOST EFFICIENT rigs EVER.  Still, profit is profit. Eh?


WRONG AGAIN. You see, BitCoin calculation difficulty increases by about 15% every 15 days or so. I'm using calculator at BitCoinWisdom

9-2 – 9-12 (11 days)27428 M0.46060.4514-3.549
9-13 – 9-25 (24 days)31817 M0.40880.4007-3.148
9-26 – 10-8 (37 days)36907 M0.31950.3131-2.835
10-9 – 10-21 (50 days)42813 M0.24240.2376-2.597
10-22 – 11-3 (63 days)49663 M0.1760.1725-2.425
11-4 – 11-16 (76 days)57609 M0.11880.1164-2.308
11-17 – 11-29 (89 days)66827 M0.069450.06807-2.24
11-30 – 12-12 (102 days)77519 M0.026910.02638-2.214
12-13 – 12-25 (115 days)89922 M-0.00976-0.009565-2.223
Yes, bitcoin mining *may* be profitable if you have the best hardware... IF you own the hardware. After all, you may as well buy the miners yourself, run them yourself, make back your investment in about 2 months, and profit thereafter yourself rather than have the ROI end in 100 days by "buying" into their pool. AND never worry about your money going to some unknown people in danger of being shutdown by SEC or whatever their foreign equivalent agencies are.

And the bitcoin mining difficulty levels goes UP periodically when to make sure the coin are mined at a near-constant rate rather than someone figured out how to mine them more "efficiently" and flood the market with them. So your profit will steadily decrease.

In fact, you NEVER even earn back the 2000 you used by buy the equipment with. According to the chart (fee free to go play with the numbers yourself), by day 110 you don't even make enough to power the rig, much less profit.

But as an investor? Don't be crazy. Not only is this unregistered security, some of these schemes don't even tell you what pool are they using, how much processing capacity do they have, and stuff like that. In fact, there's no proof that they are doing ANY Bitcoin mining! (some, on the other hand, are actual mining pools)  The entire website could have been an "HYIP" site where they just talk about put money in, get money out for X days, had Bitcoin not been mentioned! In fact, swap out Bitcoin for something else and the site will be mostly the same! Also, they only pay you back for 1000 days when they should be paying you for LIFE if you're really buying a "share" of the processing power!

In fact, this is so potentially illegal, one of the foremost Bitcoin developers have came right out and said these "cloud mining pools" are likely ponzi schemes!

So if you want to play with Bitcoins, then buy a mining rig (or 7), or join a mining pool with your existing hardware.

Consider this alternative angle... If they have the spare capacity... Why aren't *they* mining with it? Clearly, it's more profitable for them to "rent" you the capacity than to mine themselves. So how can YOU achieve ANY profit?

Do NOT "buy" into cloud mining pools. GIVING people money in hopes of financial return is INVESTMENT, and that sort of stuff requires government approval, no matter what sort of fancy terms scammers slap on the thing. If you do, then don't cry when they take your money.

In Summary:
  • Bitcoin Mining: okay, but getting worse  logically makes no sense
  • Buying a Share of Pooled Bitcoin Mining: bad, potentially illegal offering of securities, likely Ponzi scheme according to Bitcoin experts. 


  1. Michael Q Todd wrote:

    "This was written before Bitclub even started and actually it is going great! 7000 or probably more by now are getting paid daily.
    Declared legal right from start in USA of A unlike predicted here. "


    Declare legal by who? Yourselves?


  2. btc scam page +letter