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.