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The past and present of Bitcoin Mining Fraud

Bitcoin mining and frauds are an unfortunate reality that we have to tackle as a sector. From things like Bitconnect Labs to Butterfly to Onecoin, there are a lot of scams and frauds around.

These schemes leave people tall and dry with money lost and no product or service rendered. They play on the greed of people and the irrational expectations of earnings, despite the exaggerated promises of earnings.

In the end, these schemes sow mistrust among users and attract regulators in a nascent industry where everyone is already walking on eggshells.

Before going into breaking the categories below, these Bitcoin mining frauds fall into:

  • vaporware – Hardware that is "sold" but in reality it is only an idea and no real creation is created or if it is realized there is little or no value in hardware (eg Butterfly Labs)
  • Cloud Mining – With the offering of shares and other constructs, it is easy to sell people with virtually no value digital units. By offering consistent returns this creates a false sense of security that typically ends with exit scams (eg BitClub)
  • Robo Trading, Tumblers and HYIPs – This model is usually a farce, claiming that there is a team or algorithm behind the scenes "trading". From this activity, they give you a specific% daily gain (eg BitConnect)


Although many consider companies like Bitmain to be bad societies, many people do not realize how disconcerting the mining scene was in the first days of 2010-2014 in particular.

It was quieter times with less (almost) mania like today with ICO. The media did not understand anything and instead, probably, you had what was similar to the dawn of the web. This means mostly technical enthusiasts and enthusiasts, but there are also cunning scammers and bandits of Crypto-hackers who try to steal people's money.

Since many protections were not available, it had a "darknet" atmosphere in which you were not really sure of who or what was safe. For example, many altcoins were mainly scams in 2014, in particular the anonymous cryptocurrencies.

BTC's mining and investing business has had a subtle but constant threat of fraud since the early days. Unfortunately, the minds behind such initiatives have become smarter and more clever in their methods.

Hardware that does not exist alias vaporware has been less common recently since there are now many more legitimate options for the purchase of mining hardware like Bitmain or Halong Mining.

One of the first and most clamorous vaporware scams was with Butterfly Labs. Butterfly Labs collected customer funds, built machines, extracted them and supplied them to customers when the profitability of the mining was practically worthless.

In 2016, this caused the regulatory hammer to come down in the form of a lawsuit:

FTC logo

Title Bitcoin Mining Fraud

Document relating to the FTC case

"Butterfly Labs and two of its operators have agreed to settle the Federal Trade Commission allegations that have deceived thousands of consumers on the availability, profitability and novelty of machines designed to extract the virtual currency known as Bitcoin and that have unjustly held consumers in – face the payments despite not having delivered the machines as promised.

Under the terms of the agreement, Butterfly Labs and its partial owner and vice president of product development, Sonny Vleisides, and its general manager, Darla Drake, will be banned from misrepresenting to consumers whether a product or service can be used for generate Bitcoin or any other virtual currency, at which date the consumer will receive the product or service and whether the product is new or used. Settlements also include partially suspended monetary judgments due to the impossibility of payment by the defendants.

"Even in the rapidly changing world of virtual currencies like Bitcoin, companies can not fool people on their products" said Jessica Rich, director of the FTC consumer protection department. "These settlements will prevent defendants from deceiving consumers".

Image of the creators of Butterfly Labs

Nasser Ghoseiri (left) and Sonny Vleisides (right) are the co-founders of Butterfly Labs

After receiving a fine and having had to close the company, Butterfly Labs was over. But what appeal to customers? Unfortunately, not much.

Since then, the market has a greater intelligence and awareness of loyal offerings, especially with the advent of the legitimate ASIC providers.

Cloud Mining

While mining cryptocurrency itself is absolutely not a scam, some constructs and services rendered by brokers are absolutely. Cloud mining is the place where digital actions are promoted in a mining operation and "returns" are provided for your investment. Even if there are legitimate players in this space, there are also cheaters.

Because there's almost no way to prove you're getting an actual point in a data center, cloud mining is a serious enigma. Of course, you could verify that you are receiving payments in your wallet, but in terms of back-end data mining, the proof is doubtful at best.

Bit Club logo

An example of a Cloud Mining scheme that promises returns from your investment

How Cloud Mining works

The premise of Cloud mining is simple, you buy a certain amount of hash power, often called "shares" that allows access to a part of the data mining center (similar to the rental of a room).

Typically, a menu is provided with some cryptocurrency options and algorithms associated with mining. For example, Bitcoin (SHA-256), Monero (CryptoNight) or Zcash (Equihash).

In exchange for the purchased hash of the Cryptocurrency specification, the quantity X of Cryptocurrency is then sent directly to your wallet. You can use a profitability calculator based on the current market price, the difficulty and the hash rate of the network, to determine what the payment would be.

Payments may vary in frequency depending on personalization and may be schedules (if a sufficiently high threshold is reached), daily or weekly.

This is one of the easiest scams to invent because the entire construct of you that buys digital shares from a company "somewhere over there" is a rather dubious basis for an investment.

Nevertheless, we have certainly seen some blatant scams mixed with seemingly legitimate operations that provide fair market value for products and services. This can make Bitcoin's cloud computing frauds difficult to detect for some investors struggling to filter out the noise.

Robo trading and HYIP schemes

These are one of Bitcoin's scams, if not the smartest of all. The reason is that these operations exploit fake but well-functioning Web sites to convince users with a good-looking user interface, fast daily payments and withdrawals.

2017 seems to have experienced a surge in high-yield investment programs (HYIP) such as Bitpetite, Davor and the infamous Bitconnect.

BitPetite Dashboard

Bitpetite has claimed to be a tumbler that will give you returns on your encrypted loan

The way they worked is that you would have created an account that would have a wallet address (similar to exchanges) in which you would send your currency. Cryptocurrencies such as BTC, LTC, ETH and even XMR were commonly accepted and indicated this balance once sent.

The platform through a dashboard would then show your investment and how much you earned from your investment. So, if the platform has promised a return of 5% per day, your $ 100 investment would show a $ 5 gain on your account.

The premise of how these returns were obtained includes a variety of narratives such as Bitcoin mining and trading algorithms also in place for tumbling services. But most of the time it's all that I am, stories to keep unwitting users happily managing this con-machine.

The problem with these setups is that vouchers work extremely smoothly and without interruption, which generates a false sense of trust among users who consider "good because it pays, it must be legitimate". The longer this charade continues, the more users will feel more confident in this shaky investment.

Bitconnect What is Infographic?

BitConnect was a bit more complex but very similar to the Bitpetite set-up

BitConnect worked allowing you to deposit into BTC which would then be exchanged with BCC (Bitconnect currency) which would then be used to invest in a robotic robot and a trading algorithm. This "algorithm" would presumably be mistaken for you and would earn about 1% per day on your investment.

There was a function where you could reinvest your profits which would increase your main investment in the workplace and increase your payments based on the increase in the amount invested.

This led to a total boom in YouTube "millionaires" such as Trevon James, one of BitConnect's best known shin. In the end, Trevon James and a number of other Bitconnect promoters were contacted by the FBI and the SEC for a hearing.

This could potentially promote what turned out to be a ponzi scam and seems to be part of a larger investigation.

The really sad thing about Bitconnect is the false sense of trust it has created and that has pushed people to do really crazy things like losing their life savings.

Final thoughts

Although the physical Bitcoin mining scams have been largely eliminated, there are new smarter scams that have taken their place.

vaporware dupes users with non-existent or worthless hardware (eg Butterfly Labs)

Cloud-based Bitcoin Mining offers digital data mining shares and contracts that promise consistent returns.

Robo Trading and HYIP claim to use behind-the-scenes algorithms "trading". From this activity, they give you a specific% daily gain (eg BitConnect)

The good news is that many of these schemes are easy to identify.

Red flags include: guaranteed promises of earnings and returns, specific style incentives%, referral or MLM behind the model and a website that reproduces the appearance, feel and functionality of other proven scams that offer similar benefits.

It's still a wild and savage crypt, so watch out there.

Image via: A detail of Charles M. Russell's painting "Big Nose George and the Road Agents". JONATHAN BLAIR / CORBIS / GETTY IMAGES

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