Other Bitcoin Scams and Common Tactics - You will never find a more wretched hive of scum and villainy. We must be cautious.
—Obi-Wan (Ben) Kenobi, Star Wars Episode IV: A New Hope
If you want to invest in Bitcoin safely, there is a simple way to do it. Purchase Bitcoin on an exchange or through someone you know who has it, withdraw it to a local wallet, and print it out onto a paper wallet. You can then use the QR code on that wallet to add funds when you want to increase your investment. Every time you want to withdraw any of your bitcoins, you will have to withdraw all of them, and the wallet will no longer be as safe as an untouched paper wallet.
It isn’t the most convenient way to hold your Bitcoin if you plan to spend or invest it in other ventures, but it is the safest way to invest in Bitcoin itself without getting scammed.
If you want to go a step further and invest in new technologies or companies, you will have to start wading into the cryptocurrency community. Once you do that, at least at the time of this writing, you are almost guaranteed to come across the worst elements of that community. As with all cultural and economic phenomena, Bitcoin has attracted all kinds of people. Criminals are certainly included in this mix, perhaps disproportionately when compared to the general population. And these criminals like to prey on people new to the scene.
Many major cultural phenomena seem to have this downside. We might compare the history of Bitcoin’s emergence with that of the hippie movement. In 1967, several mainstream media outlets covered the growing acid wave in the Haight-Ashbury district of San Francisco; popular music of the time—such as Scott McKenzie’s San Francisco (Be Sure to Wear Flowers in Your Hair)—advertised the lifestyle that was developing there.
This public attention caused streams of disenfranchised youth to descend on the city looking for free lodging, free food, free drugs, and free love. But the economics of thousands of people wanting stuff for free and increasingly fewer people willing to give it to them simply didn’t work out in the long run. Eventually, some of the older, more experienced residents of Haight-Ashbury began to prey on tourists visiting the district as well as new arrivals.
There are many theories as to why the hippie movement originating in Haight-Ashbury didn’t survive, and I am not in a position to judge. What was clear to just about everyone who wrote about the movement, however, was that the massive influx of people put a stress on the community. It is safe to say that by 1969, someone trying to find a hippie in Haight-Ashbury was at least as likely to find someone masquerading as one with the intention of profiting off the movement’s reputation.
There are a lot of parallels to be drawn between Bitcoin and Haight-Ashbury. When the price of Bitcoin exploded in 2011 and again in late 2013–early 2014, the currency attracted the attention of mainstream media outlets and through them, hundreds of thousands of semi- and wannabe technonerds desperate to catch the next wave of digital wealth. But there already were thousands of people in the Bitcoin economy and they had years of experience in a realm where experience was exceedingly rare.
Unlike the hippie movement of the late 1960s, which was based on rejection of money and material goods, the Bitcoin movement is all about money. Bitcoin is a currency, after all. Although the behavior of the Haight-Ashbury scammers was in opposition to the hippies’ philosophy, the Bitcoin “movement” revolves around money, so it shouldn’t surprise anyone that it has attracted those whom Hunter S. Thompson would call “the Greedheads.”
Many of us were attracted—some might say lured—to Bitcoin by the eloquent words of people such as Andreas Antonopoulos and Roger Ver, two well-spoken Bitcoin evangelists, each of whom was at one point or another labeled a “Bitcoin Jesus.” They promised a new economic system, one that would be less dependent on greed and thievery.
Instead, what one is currently likely to find in the cryptocurrency community is a sea of schemes and coin types that are doomed to failure for a variety of reasons. In some cases, their developers don’t have the skill to compete in an increasingly competitive market. In others, the schemes are scams from the get-go. And sometimes they simply lack the security required to survive the technological onslaught that hits every major cryptocurrency company at one point or another.
This chapter will not properly prepare you for every scam you will find in Bitcoin. Instead, it will give you a general overview of the biggest scams to hit the cryptocurrency market, so you can get an idea of what has happened before and hopefully gain some skill in recognizing the scams that are still going on today.
You can run into two types of scams in the Bitcoin community but depending on how deep you go, you might only ever see one of them. The first is a straightforward type of scam: a service, usually a casino or exchange, closes while people have their bitcoins deposited and the customers never see their funds again. In some cases, the event is due to a hack; in others, it’s the creator who ran away. As Bitcoin’s economy solidifies, these scams are becoming easier to avoid. The “safe” exchanges that have insurance and oversight are able to provide a relatively secure position for those who want to save and spend bitcoins.
Although nothing is guaranteed in Bitcoin, these Mt. Gox-like events are becoming more rare; although popular multi-cryptocurrency exchanges still have controversies and issues, the Bitcoin-only exchanges—Circle, Coinbase, etc.—are relatively safe for small-to-medium Bitcoin holdings. Long-term savings should still, and will always be, better off in an offline wallet, but the era of pure Bitcoin exchanges collapsing every few months seems to have passed. These scams/events are still a risk in gray-market services—Bitcoin launderers, porn sites, casinos—as well as black-market services, but the average user is relatively safe.
The second kind of scam is a bit more complex and tougher to recognize. The important principle to keep in mind is that if it smells like a Ponzi scheme, it likely is. Bitcoin doesn’t change that. Companies will offer a service, often using “cloud mining” (i.e., they will mine for you and you will “rent” the hardware from them) as a front, and will pay out money to users—supposedly from the mining profits, though often they actually come from new investors.
More recently, as cloud mining has become less popular due in large part to the number of scams in the space, new scams have been born. Some scammers pretend to be Bitcoin day traders or to be launching a brand new exchange that is sure to become the best around. One of the most tried-and-true scams is to create a new currency and claim that it is poised to challenge Bitcoin. What you have to remember is that there are tons of companies already doing these things.
Since there are established exchanges that the vast majority of the community uses, a new exchange has a long, uphill battle before it becomes profitable.
Mining is easily verifiable on the blockchain. If the service can’t present an address with enough coinbase inputs—i.e., inputs designating the creation of new coins through mining—to be consistent with the amount of hashing power it claims to have, then it shouldn’t be trusted. In my personal opinion, it is best to avoid cloud mining altogether. If it is something that can’t be verified on the blockchain, you’ll have to use common sense. Remember, just because something is a “Bitcoin business” doesn’t mean it has any inherent advantages over any other business. As with any other business, it should have some kind of good online reputation. That reputation isn’t the be-all, end-all, but it should tell you something about whether a company is worth dealing with.
If a company is claiming that it sells enough novelty “physical bitcoins”—or anything else—to pay returns to investors, then look for customer reviews with pictures. Check out the site’s Alexa rating at Alexa.com and see if its traffic is consistent with that amount of business. Whois.com will allow you to look up who owns a website’s domain name. If, instead of a real name and address, there is a service such as “WhoisGuard” or something similar, this is a sure sign the owner of the business doesn’t want its customers to know who they are. With a business such as an online casino, that might be reasonable; in 99 percent of other cases it is not and the company should be avoided.
The most important thing to remember is that if it sounds like a scam, it probably is. Be wary of anyone who promises you instant or unrealistic returns on your investment. The basics of Ponzi schemes work in cryptocurrency just as well as in any other business. If older investors are being paid with the capital from new investments, you are dealing with a Ponzi scheme. People will claim all sorts of things to make it seem as if revenue is coming from elsewhere, so you have to do your own research and dig deep into anything at which you are going to throw any money.
The offenders listed below hail from all over the Bitcoin spectrum. Many had been considered pillars of the community before they went down. Mt. Gox’s Mark Karpelès, who isn’t on this list only because his case necessitated a whole chapter, once sat on the Bitcoin Foundation’s Board of Directors. The current respect of the community is not a guarantee that a figure is reputable or trustworthy. There was a time that GAW Miners, a company I will talk about later, was considered a giant of the mining industry. As mentioned before, things are solidifying and companies that can be trusted are becoming more apparent, but scams are still commonplace.
Before I get into the detailed list, here are a few other pointers to keep in mind:
- If another company or person holds your private key, they essentially hold your bitcoins. Much of the appeal of Bitcoin is that no bank can lock down your money but if you give someone your private key, you essentially give them the ability to use it as they please.
- Pump-and-dumps happen all the time in the altcoin space. Every announcement by a coin’s development team or community has to be taken with a grain of salt. Their motives are not always clear, and as the coin’s creator, they likely hold a large number of coins themselves, so it is in their interest to inflate the price. If they can get an increase of even a few cents as a result of an exciting announcement of a feature (that might or might not ever be released), they stand to make a huge amount of money when they sell the coins after the price increase.
- Beyond that, there are groups out there—independent of coin developers—that will find an altcoin with a small enough volume that their group’s total wealth can move the market by itself, simply by buying up relatively small amounts over time. These individuals, largely seen as shady by the rest of the community, will move a coin’s price up, only to dump it at a predetermined time. To complicate things further, the individuals in the group depend on their leader to refrain from dumping his coins before the rest of them. It is not unheard of for groups to be accused of having an inner circle among their membership that gets the “real inside information.”
- Large groupings of Bitcoin and other monies attract scammers and hackers. Exchanges become targets for hackers and even the most well-meaning companies can have a hard time recovering from a hack that cost them something in the six- or seven-figure range.
- Diversification is key. If you hold all of your coins on one exchange and it gets hacked, you will lose your entire holdings. If you keep them spread among several exchanges, you will not lose more than a portion. If there is a rallying cry behind the Bitcoin movement, it would be the idea of decentralization. There is no reason for your bitcoins to be centralized. The same goes for offline and paper wallets as well. Even if a wallet is secure, you shouldn’t hold everything in it. If you insist on keeping everything in paper wallets, make sure you don’t keep all of them in the same place. Physical robbery and potential damage are still a risk.
- Altcoins are a shitshow. That is not to say that they are all scams or that even a majority of them are. It is just that there are far too many for the market to support. At least 95 percent of even the good altcoins will fail. A few from the current crop will make it to the next stage of cryptocurrency history, but most will die on the vine. Being a developer for a dying coin is a scary reality, especially if you were a well-meaning developer with dreams of changing the world using your technology. Realizing after years of hard work and dedication that it was all for nothing might lead one to become desperate. And desperate people do desperate things, like compromise their ethics.
- There are a lot of scammers in the Bitcoin space and they are technically talented. Not everyone is the really good hacker they like to portray themselves as—more on this later—but enough of them are that it is safer to assume you are encountering them all the time. As a result, always be vigilant in your security practices. If you have any significant amount of money in an online wallet, then two-factor authentication (i.e., authentication with a pair of elements such as a password and a special one-time use code) is a must.
- Scams that work on the Internet in general have been carried over to cryptocurrencies as well, sometimes with a bit more sophistication. Phishing scams are common and the thieves have proven capable of spoofing legitimate Bitcoin companies’ email addresses. You can expect phishing attempts to continue. Use common sense, never follow links to accounts and then log in, and don’t believe any “double your bitcoins here!” emails. There isn’t a Nigerian prince on the other end and there isn’t a pot of gold at the end of that rainbow.
Scams and hacks are different. A scam is a service that steals from its customers, either because that was the original plan or because the owner decided to do it subsequently to cover losses or for other reasons. Hacks are bitcoin thefts by an outside source that occurred due to a security lapse. Most scams claim that the loss was actually a hack, as was the case in two of the cases below.
MintPal
MintPal was a cryptocurrency exchange with a large number of supported currencies and a professional look. Unfortunately, looks can be deceiving.
The MintPal scandal is as convoluted as any other scam in cryptocurrency history, including the Mt. Gox failure. Almost tailor-made for the big screen, it involves fake identities, corporate takeovers, and a cliffhanger.
MintPal’s problems began with what appears to have been a legitimate hack in July 2014. The hack primarily involved the loss of eight million VeriCoins. VeriCoin uses a proof-of-stake algorithm to confirm transactions. Proof-of-stake algorithms give weight to those who have significant holdings of the cryptocurrency, resulting in a somewhat stable interest rate—typically anywhere between one and five percent, depending on the coin. Unlike proof-of-work coins such as Bitcoin, which depend on hashing rates, proof-of-stake coins depend on accounts running a full node and confirming transactions in a process called staking.
If one actor gains 51 percent of the total coins staking at any one time, then they could overrule any other stakers and double-spend their coins. (Stakers are proof-of-stake coins’ version of Bitcoin’s miners. See the proof-of-stake definition in the keyword guide for a more detailed explanation.) The amount of VeriCoin stolen represented around 30 percent of the total VeriCoin supply and since most users don’t bother to stake their coins, the stolen coins would, if staked, have easily overwhelmed the network.
This ultimately resulted in VeriCoin creating a hard fork and modifying the blockchain,1 one of the most controversial and difficult things that can be done in the cryptocurrency community. The blockchain is supposed to be infallible; it is revered like a religious text, since it is the indisputable account of the coin’s history. Changing it, cryptocurrency advocates will often say, is impossible.
But it is possible, and VeriCoin proved that. It simply requires more than 50 percent of participants to agree to the change. If more people are mining the modified blockchain than the original blockchain, the new chain becomes the legitimate one. Everyone was aware of that, but many dismissed the possibility that a community could agree to it. The MintPal hack forced the VeriCoin community to make a difficult decision. They rewrote their coin’s history because if they didn’t, there would have been no future. Not only would a huge number of its users have lost their holdings, but also confidence in the coin would have vanished because one unknown scammer would have had complete, even if only theoretical, control over the network.
But the collateral damage done to VeriCoin in the MintPal hack is only a footnote in the prologue of the MintPal scam. After the hack, Alex Green, the CEO of a company called Moolah, appeared to come to the rescue of the suddenly troubled exchange. The company bought only 30 percent of MintPal and was given control of it. Green, whose real name was later revealed to be Ryan Kennedy, portrayed himself as a security expert and promised to overhaul the exchange and make it more secure.
When the site relaunched, it was plagued with problems and many users were unable to log in to access their funds. Eventually, the funds in the hot wallet were moved to an account allegedly controlled by Kennedy. Kennedy resigned from Moolah and revealed his true identity before disappearing.
He eventually resurfaced, having been arrested by UK authorities along with his partner Chelsea Hopkins. They were released on bail and the trial is still pending as of this writing.
One significant lesson to learn from the MintPal failure is that appearances aren’t indicative of legitimacy. Of the mainstream multi-cryptocurrency exchanges, MintPal had one of the prettier website layouts. I remember at one point commenting to a friend that MintPal had, in my opinion, the most “legitimate” look but those looks ended up being deceiving. The point is that you have to look deeper than just a website layout to judge the security capabilities of an exchange. Had people looked deeper into the identity of “Alex Green,” a lot of people could have saved a lot of money.
The Sheep Marketplace
The Sheep Marketplace was built as a successor to the Silk Road after federal authorities shut that site down. The Silk Road 2 had also recently shut down, with its owners making off with the bitcoins held in that system.
Many suspected that the Sheep Marketplace would follow the same pattern and their fears turned out to be correct. Withdrawals at the Sheep Marketplace stopped working and the leader of the site fingered an individual user as the perpetrator of the scam. Evidence to the contrary surfaced and the site quickly shut down. Most blame the owner as the perpetrator of the scam.
Reports eventually surfaced, by way of Czech news sites, that the alleged former owner of the Sheep Marketplace, Thomas Jirˇikovský, had been arrested not on drug and organized crime charges as Silk Road administrator Ross Ulbricht was, but rather on money-laundering charges after buying a luxury home and putting the rest of the stolen bitcoins into his girlfriend’s bank account by way of shell companies he set up.
Those reports were never confirmed and former users of the Sheep Marketplace have little-to-no hope of recovering their lost funds, considering the nature of their business on the site. The lesson that can be learned here should be obvious: if you are doing something outside of the law with your bitcoins, then there is little recourse for you when things go wrong.
Paycoin/GAW
Paycoin is a cryptocurrency created by former mining company GAW Miners. GAW Miners and its sister company, ZEN Miners, were owned by a man named Homero Joshua Garza, who went by Josh Garza. Garza had gotten into cryptocurrency after running a broadband Internet company that was accused of ripping off its customers before abandoning them; it is currently under investigation.
GAW Miners originally sold mining hardware. Initially, it was seemingly successful. Along with Butterfly Labs and KnCMiner, it was once considered part of the “Big Three” of the mining market. At some point, complaints about late shipments and accusations of used hardware began to surface, but that wasn’t out of the norm for Bitcoin-mining companies at the time, with both KnCMiner and especially Butterfly Labs facing similar accusations and issues.
GAW Miners eventually transitioned to a cloud-mining company with some features that were admittedly innovative at the time. Customers could buy hashing power and have it represented by an internal digital currency known at the time as hashpoints. Hashpoints, in addition to producing Bitcoin for its users—each hashpoint was supposed to represent mining power—could be bought and sold to other customers. If Bitcoin mining became more profitable, the hashes would as well.
They represented an easy way for people to get into mining without the risk of long cloud-mining contracts. For a while, buying hashpoints on GAW’s market was theoretically the cheapest way of buying mining power on the Bitcoin network. When the Securities and Exchange Commission (SEC) filed its complaint against GAW Miners and Garza, it alleged that GAW massively oversold its hashpoints and didn’t have anything close to enough hardware to mine the bitcoins they were claiming to mine. The majority of mining payments, according to the SEC, were paid out with new investor money.
Although many media outlets, particularly cryptocurrency-focused ones, did an adequate job reporting on GAW after the initial sale of Paycoin in December 2014, much of the initial investigation was done by users of BitcoinTalk, the most popular Bitcoin message board. The general thread, started by a user named suchmoon, will be cited, but the individual contributions can’t be. It is simply too disorganized to be properly referenced, and some members would not welcome the attention. That said, their contributions were invaluable.
Things weren’t exactly how they appeared at GAW, and payments began to slow. It was eventually announced that hashpoints would stop mining and users would be able to turn them into a brand new cryptocurrency that, GAW promised, would be revolutionary. This has been a tactic commonly used by scammers for decades: once one scam starts to run its course, the next usually follows.
After running through a few candidates, the company and community eventually settled on the name Paycoin and the arguably largest altcoin-run scam to date was kicked off.
Although leaked emails obtained through an SEC investigation all but confirm the accusations below, for legal purposes it should be pointed out that Homero Joshua Garza has not yet been convicted of a crime. But in light of the seemingly endless list of improprieties and lies, for the sake of readability, I want to get it out of the way now: the court of law hasn’t confirmed the accusations below; although the evidence is overwhelming, it remains, from a legal perspective, alleged.
Paycoin’s early site made a lot of promises. Paycoin supposedly had some very serious investors. It promised significant merchant support and included Amazon’s, Target’s, and other major merchants’ logos, seeming to imply that these merchants would accept Paycoin for payment. Paycoin users, the site alleged, would be able to pay their bills using Paycoin.
More important than all of that, at least for investors, was the promised $20 price floor. Paycoin’s price, once launched, would never go below $20, stated GAW. To support this, a $100,000,000 “Community Action Fund” was supposedly created and it would be used to drive adoption, development, and pump the price whenever it fell below $20.
Paycoin was originally offered to “early adopters” at the price of four dollars a coin. As the December 2014 launch approached, this rose periodically, eventually reaching $12 a coin. $12 a coin is still significantly lower than $20, so investors who bought the story still believed there was significant and nearly risk-free money to be made. Early hashtalk.org posts about Paycoin included excited proclamations about how Josh Garza had saved their Christmas.
GAW launched a site called Paybase. It was meant to be the primary method of purchasing Paycoins and would be a site customers could use to pay their bills and take advantage of Paycoin’s other alleged features. It was also where customers were supposed to be able to redeem their coins at $20 apiece. Although GAW had no control over the price of coins at other exchanges such as Bittrex, it could promise to pay $20 at Paybase. This, of course, was only tenable if the price at exchanges such as Bittrex stayed at or above $20, or close enough that the arbitrage opportunity was negligible (e.g., $19.95). Unless natural demand kept the price high enough, GAW would have had to support the price on every exchange that traded Paycoin.
People could buy Paycoin on Bittrex and then sell to GAW on Paybase, then use that money to buy more Paycoin, completing a never-ending cycle until the price rose to $20 or GAW ran out of money. This, ostensibly, is what the $100,000,000 Community Action Fund was to be used for. True believers thought that the price would stay above $20 naturally, as feature after feature was released and merchant after merchant got on board. It later became obvious that the fund never existed, the features weren’t coming, and the promised merchants had no connection to Paycoin.
Giving Garza and GAW the benefit of the doubt and saying, hypothetically for the moment, that they had every intention of making this plan work and that it wasn’t just a way to build hype and fleece millions, there was an issue with the plan, even if everything went off without a hitch.
GAW was heavily advertising Paycoin at $4, $8, and $12. It placed an article in The Wall Street Journal’s MoneyBeat blog. It had paid for advertising on every major cryptocurrency media outlet on the web and was sponsoring a major convention. Everyone who would have possibly had an interest in Paycoin early on had already heard about it and had an opportunity to buy Paycoin at those lower prices. Why would the typical Cryptsy or Bittrex user buy Paycoin at $20 when they could have purchased it at $12 or lower?
Paycoin needed a massively successful launch to justify that price tag, especially as GAW had already set the market lower by selling the coin at that price in its pre-sale and launch. There were very few people left in the cryptocurrency community who had not heard of Paycoin and would have missed out on the opportunity to buy in at the multiple prices lower than $20. Most of them didn’t believe Paycoin was worth what Garza was selling it at and the ones who did had bought in already.
Instead of a successful launch, everything was bungled at every turn. First, Paybase was delayed until after Christmas. This led to a lot of complaints from investors who had invested what had originally been earmarked as Christmas gifts for their children. Paycoin had hyped a deal with Visa; when it never happened, Garza blamed Paycoin’s detractors for scaring Visa off. Meanwhile, Amazon, Walmart, and Target all either denied connections with Garza or didn’t respond to inquiries about Paycoin. Garza was unable to produce any proof of his claims that a deal was being worked on.
Later, an email leak illuminated the issue, revealing that no communication between Paycoin/GAW employees and the aforementioned companies ever took place or was even attempted. Furthermore, there was only a halfhearted and hastily made partnership with a company that didn’t have permission to print Visa cards. Later, Garza would claim to be close on a deal to get a MasterCard-branded debit card, but MasterCard outright denied the claim.
Essentially, every feature promised by Garza and GAW fell through. There was no merchant adoption worth talking about, no debit card, no bill pay, no PayFlash (a feature ostensibly allowing instant conversion of Paycoins to “usable funds at the largest merchants in the world”), and when Paycoin officially launched, it topped out at $13.50. Although GAW would later claim that it attempted to keep the $20 payfloor and stated that it did buy some Paycoins at $20, the open market price never even hit $14. If Paybase ever did pay $20 a Paycoin, it was only for the briefest of moments. Things held for a while as people still expected Garza to come through. Some even sounded giddy at the prospect of picking up more coins at this “reduced” price.
The floor was never supported and things began to fall apart quickly. An “Honors” program was announced in which users would deposit Paycoin into Paybase and GAW would honor the $20-a-coin promise but would only do this for a certain number of Paycoins a month. That was good enough to cause a temporary price recovery—which was quickly pushed down by a dump.
However, it was soon pointed out by media outlets that the plan would take decades to repay the Paycoin purchased at launch; that the plan didn’t make sense because users could still move Paycoin in a never-ending cycle of buying it on the open market and then selling it (even months later) at Paybase; and that even if it could work, it was most likely illegal.
Even before everything fell apart, the community was angry enough that Garza had to cancel a speech at The North American Bitcoin Conference (TNABC) in Miami. The outrage had been bad enough that the leadership of the TNABC decided to let him speak as a way for the community to ask him the tough questions—and then Garza abandoned that plan and the organizers at the eleventh hour.
Prime Controllers also became an issue at this time. Prime Controllers were a supposed feature of Paycoin. Like all proof-of-stake coins, Paycoin has its transactions confirmed by users keeping their wallets open and “staking” them. They then confirm transactions for the network and generate interest on their coins. In Paycoin, the interest rate was set to a relatively high five percent. But these Prime Controller accounts, which were supposedly auctioned off to the highest bidders, claimed a staking rate of 10 percent. It was originally unclear if these Prime Controllers were intended to do tasks somehow more difficult than regular staking, but it was later proven that they didn’t do anything regular stakers didn’t and were only a reward for paying more.
Regardless, things got far worse when it was revealed that many of the Prime Controllers, most of which were still controlled by GAW, were actually staking at rates much higher than 10 percent. Investigation of the blockchain revealed that certain Prime Controllers were staking at an absolutely insane 350 percent that was compounded multiple times a day to equal a total interest rate of 3,500 percent.
If Paycoin had any credibility left in the cryptocurrency community, this scandal killed it. One of the most appealing features of cryptocurrencies is that they are decentralized and no single entity controls them. If Paycoin can simply be printed at will—and the Prime Controllers were undoubtedly digital money-printing machines—there isn’t much that separates it from central bank-powered currencies. The only major difference is that instead of being backed by a powerful government, Paycoin was backed by the word of Homero Josh Garza and the company he founded, which was quickly proving itself to be very disreputable.
Soon after, the biggest news hit: an SEC investigation had been opened up on GAW Miners and Josh Garza. Garza initially denied the claim and stated that he was considering legal action against the website that reported it.
It was eventually confirmed—by other media outlets and then by actual SEC documents—that something was and continues to be going on with GAW, the SEC and other authorities. That investigation is ongoing and as of this writing the SEC has had little to say publicly about the case. It was also revealed at that time that GAW had lawsuits filed against it, including for neglecting to pay an electric bill of more than $130,000. GAW did not show up for court.
It all got uglier when Garza and many GAW employees had their emails leaked. Everything was seemingly out in the open and nearly every suspicion about GAW and Paycoin appeared confirmed.
The emails showed Garza calling regular investors “muggles” after the name given to non-magical characters in the Harry Potter franchise. It also showed there were no conversations with Visa or MasterCard; that Garza had promised more than 100 percent of his company away; and that he had borrowed untold amounts of money from Stuart Fraser, a partner at Cantor Fitzgerald, a well-respected investment company.
Garza appeared to have allegedly stolen money from both Fraser and his own company, led employees on, fired an employee he was having an affair with after his wife got jealous, had an estate sale before disappearing, sold his three cars, lied to others about how he obtained those cars (he said the Tesla was a “gift from Elon [Musk]” even though a purchase receipt was found in his email), and had trouble paying his business partners, among countless other improprieties.
In most scenarios, this would be the end of a company. It would dissolve, everyone would go their separate ways and the customers would be left hoping the SEC investigation would get them some return on their investments. The problem was and remains that just because a coin was created by a disreputable person, and just because that coin has no redeeming qualities at all, doesn’t make the coin go away.
Throughout the whole ordeal, Paycoin dropped in price. As of this writing, it is $0.05. This is a far cry from its promised $20 price floor but still sits above many legitimate and useful altcoins, which just shows that some people are willing to hold onto an investment—even one proven to be worthless—if they paid a lot for it. Few wanted to buy Paycoin at $20 a coin because, in part, they knew it had been sold for much cheaper; the inverse of that psychology has managed to keep the coin from dying completely. But it isn’t going anywhere. Paycoin won’t ever be the future or even a significant player in the cryptocurrency scene. It will toil in the depths of the altcoin world until everyone involved finally gives up or gets bored.
People paid a lot of money for Paycoin. So much so that selling at $5 or $1 would have been a major loss for them. They held further still as the coin dropped past the $0.50 and $0.25 milestones; then it got even worse. It is understandable that investors were hesitant to sell at those prices when they bought in at $12 but even the meager amount they could have received then would have been better than what they got by holding on.
If I sold you snake oil as a cure for the common cold for $12 and then you found out it didn’t work as advertised or do much of anything else, would you be willing to sell it for a dollar? How about $0.50? What about $0.25 or $0.01?
The point is, you should be willing to part with ineffective snake oil at any price, because you know that it’s worthless. But investors have a hard time seeing it this way. In their mind, they paid $12 for it and selling it for anything less than $12.01 is a failure.
It might be a failure, but selling at $10 is less of a failure than selling at $0.10—just as selling at $0.10 is less of a failure than selling at $0.01, and selling at $0.01 is still less a failure than selling at $0.0001 (which is possible in cryptocurrencies).
It is understandable that someone who has put so much money in would decide to wait and see what happens rather than drop coins when it is low. In general, selling while the price is low is never a good investment move—but Paycoin, despite its spectacular crash from its $14 heights, is extremely overvalued. Paycoin has more total coins than a currency such as Nxt and it has a worse and possibly malicious development team. It has Prime Controllers that could be turned on at any moment to ruin the currency.
Few people who know what they are doing are still paying attention to what the “Paycoin Foundation” is doing. Paycoin’s reputation has alienated the companies it once claimed to have partnerships with, the coin’s creators are being investigated by the SEC, and, even discounting the Prime Controllers, it has an unusually high interest rate. Each NXT is worth about a penny and a half. As I mentioned earlier, at the time of this writing, a single Paycoin is worth about five cents. It’ll probably be lower by the time you read this, but as long as a single Paycoin is worth more than a few hundred Satoshis (i.e., a hundredth of a penny), Paycoin remains overvalued.
Many more promises were made and went unfulfilled. Coinstand was billed as a service where users could use their Paycoin to buy Amazon products while valuing each Paycoin at $20. That was eventually turned into five percent off, but it didn’t matter for the vast majority of Paycoin holders because the system was only open to a small group of “beta testers” likely handpicked by Garza. (He had posted a message asking the community to nominate the most loyal members a week or two earlier.) A few people in that group did receive their orders but the products soon stopped coming, and today the site is gone and there is no talk of a revival.
As GAW fell apart, the leadership split and the newly formed Paycoin Foundation attempted to distance itself from Garza. Another developer, Phil Vadala, who had been in charge of Coinstand, split off from both groups and allegedly stole a few Prime Controllers from Garza, though it is unclear how Garza claimed ownership of Prime Controllers supposedly sold to private investors. Coinstand was later revealed to have been funded by Garza, despite his initial claims that he had nothing to do with the site.
This action led to Garza posting a Skype conversation with Vadala in which Garza claimed the Prime Controllers belonged to organized crime elements in Russia and a Middle Eastern investor who Garza said shouldn’t be crossed.
It never seemed to cross Garza’s mind that admitting he had done deals with criminal organizations was a mistake. He also didn’t think sending thinly veiled threats to one of his former developers and revealing that he was prioritizing supposed early investors—and criminal investors at that—over the community’s interests might be concerning to the rest of the community.
I interviewed Garza about this event and he seemed baffled that I was more concerned with his comments than the theft allegedly perpetrated by Vadala.
But as mentioned, Paycoin is still technically alive. It can still be bought and sold on various exchanges and there are a few people left in its community. The coin continues, albeit in a massively depressed state, despite Garza, GAW Miners, and ZEN Miners all being subjects to open SEC investigations.
Paycoin will die when the last two members of the community leave and exchanges stop carrying it. Although its eventual death is considered a foregone conclusion by most, it does showcase how resilient real cryptocurrencies are. Paycoin broke nearly every principle the cryptocurrency holds dear (decentralized control, limited supply, transparency) and was run by a likely scammer who probably set out to create it with bad intentions, has vanished from public view, and has a pending court case with the authorities; and still the network continues to function. This bodes well for currencies with honest development teams and especially Bitcoin, which has its entire economy helping to support it.
The lesson that should be learned from Paycoin is this: just because a company gets coverage from mainstream media outlets doesn’t mean it is reputable. Like all scammers, Bitcoin scammers tend to move from project to project; if a company is transitioning to a new venture, make sure it isn’t just trying to bring fresh money into a quickly collapsing Ponzi scheme. If someone is promising you a 500 percent increase on your investment, they are lying. And just because “HODL” (yes, it’s a humorous misspelling of “HOLD”) is a good strategy when investing long-term in Bitcoin, holding the whole way down is not a viable strategy for altcoins that can lose nearly all their value quickly with no hope of recovery when controversy strikes.
Bitcoin is full of scams. That doesn’t mean it is a scam or that it should be avoided. The Internet itself is likewise full of scams. But just as it took us a while to get used to the Nigerian prince scandal and the fake Bank of America phishing emails, it is taking us a while to get used to the scams that infect the cryptocurrency space in a similar fashion. Wherever money can be found, scammers are sure to follow. Bitcoin is money so it only makes sense that scammers would be attracted to it. All this means is: be cautious. Do your research and never invest more than you are willing to lose. It is almost a cliché at this point but Bitcoin really is the Wild West, only there is no sheriff to keep order.
