The bankruptcy of MtGox, once the world’s largest bitcoin exchange, began in February 2014 with the loss of an estimated 750,000 bitcoin worth $35 million dollars at the time. While MtGox remains the largest bitcoin scam to date there have been others, some not as well known, causing investors to lose millions of dollars. Here is our list of the other top 5 cryptocurrency scams of 2014.

Fifth Place

The BTC-Arbs cryptocurrency scam only lasted a few months in the first quarter of 2014. The company was a typical HYIP (high yield investment program) promising returns of over 1% per day on a minimum deposit of $50 in bitcoin.

BTC Arbs
When the site went dark there was an effort by customers to obtain refunds which was only slightly successful. Of those who joined in the effort there is a spreadsheet indicating over 573 bitcoin were lost with refunds of only 14 bitcoin.

Fourth Place

Bitcoin Trader was another HYIP ponzi that lasted much longer than BTC-Arbs: from late 2013 until October 2014. Bitcoin Trader promoted itself with a much more polished website than BTC-Arbs and tried to hide the fact that is was a ponzi scheme by claiming it earned profit from both bitcoin mining and arbitrage.

Cryptocurrency Scams

The owner John Carley also did his best to keep Bitcoin Trader off review sites that rated HYIP programs like Money News Online lending credibility to the site. Customers of the service lost from $250,000 to $500,000 according to estimates by CoinDesk.

Third Place

Fibonacci was a company started by Jason A. Hudgins of Florida, USA to produce scrypt ASIC miners. Mr. Hudgins was a respected member of the Litecoin Association and poster at the Litecoin Forum which he used to promote his scam. Fibonacci began accepting payment for pre-orders of scrypt ASIC miners in March 2014, encouraging customers to pay not only with bitcoin and litecoin but a new altcoin called CacheCoin he had developed. The company claimed they would beat KnCMiner to market and would deliver their litecoin miners in late summer 2014.

Fibonacci

Of course the company never produced any miners at all and Fibonacci and Mr. Hudgins is now being sued in Lee County, Florida. It is estimated that investors were defrauded of more than $1,000,000 and the criminal complaint can be read here.

Second Place

Fibonacci was not the most successful litecoin scam of 2014. That dubious honor goes to Litecoin GEAR.

Litecoin GEAR began with sales of FPGA litecoin miner boards in October 2013 by Cristian ‘Chris’ Ilie Schipor of Bucharest, Romania. He posted using the handle ‘beekeeper’ at the Litecoin Forum and was actually first to market with a successful commercial litecoin miner based on an FPGA chip; up to then litecoin was mined using a GPU graphics card. He claimed 15 years experience in FPGA design and did earn a Bachelor’s Degree in Computer and Informatic Science from the Polytechnical Institute of Bucharest in 2000. He operated under the umbrella of a legitimate Romanian based company called Bitcage Tech SRL, see this report for details.

In early 2014 ‘Chris’ began selling litecoin cloud mining from his website as ‘Farm$hares’ granting buyers a percentage of profits from the litecoin mining farm he claimed to have developed. Sales were brisk and a new product was soon introduced called ‘qASICS’ mining shares; supposedly based on custom ASIC chips he had manufactured for him in China. Shares cost about $5 per mH/s and offered return on investment in as little as 6 weeks.

Litecoin GEAR was never transparent, never provided a public mining address or photos of what had to be a very large mining farm if legitimate. Red flags should have been set off for everyone investing but the promise of easy money was too much for many to resist. To add to his credibility many trusted members of the Litecoin Forum either promoted the scam as affiliates or gave tacit approval.

What may have started as a legitimate hosted mining operation appears to have turned into a full blown ponzi scheme in August 2014 when Chris introduced an affiliate program to help him sell qASIC shares. Within a month literally hundreds of affiliates were promoting Litecoin GEAR across the internet. The scam began to unravel in late November and early December 2014. Apparently in desperate need of new funds to payout investors and keep his ponzi afloat several sales at up to 49% discount were offered.

By that time Litecoin GEAR had over a thousand customers and had sold mining power rhok0 estimated from a low end of 196 GH/s to as much as 574 GH/s. Note that the hashrate of the entire litecoin network is presently only 1192 GH/s. In late December Chris halted weekly payouts claiming his site had been hacked and his user database corrupted. Four months later the website is still online but no one has received any payouts. Because hope springs eternal and it is often hard for someone who has been scammed to own that reality many threads at the Litecoin Forum are still actively monitoring Litecoin GEAR and hoping the service resurrects.

One user named Reini at the GetHashing Forum actually paid a visit to Chris Schipor, who is still living in Bucharest, and described the meeting in this post. Based on his meeting with Chris he is not very hopeful that payouts will resume:

screenshotgh

At this point in time Litecoin GEAR should be assumed to be a failed ponzi scheme. It is difficult to assess exactly how much money Chris managed to scam. Based on our own research from user posts at the Litecoin Forum we conservatively estimate at least $1,000,000 dollars invested into the scam were lost, probably much more. This does not take into account overdue mining proceeds that would be due if the operation were legitimate.

This has not been a very good year for Litecoin in general. The two scams, Fibonacci and Litecoin GEAR have caused significant loss of credibility for the cryptocurrency currently trading at $1.43, down from a high of almost $50 in November 2013.

First Place for Cryptocurrency Scams

GAWMiners and Paycoin takes first place for our list of cryptocurrency scams of 2014.

GAWMiners started selling home miners sourced from Gridseed and ZeusMiner in March 2014. They treated their customers well and soon developed a loyal customer base. They branched out into selling cloud mining and Hashlet virtual miners and many customers attested to making money, especially with the initial offering of Hashlets in the summer of 2014 which returned investment in as little as 6 to 8 weeks.

For a detailed chronology of GAWMiners and Paycoin see the first page of GAW / Josh Garza discussion. Paycoin XPY CoinStand Mineral. ALWAYS MAKE MONEY 🙂 at the BitcoinTalk Forum. It is highly doubtful that GAWMiners ever owned mining hardware sufficient to back the cloud hashing sold. Bitcoin and altcoin prices declined in the fourth quarter of 2014 hurting mining in general. With Hashlets no longer profitable Paycoin was introduced on 12 December2014 and users were urged to convert their Hashlets to Hashstakers.

In leaked emails Garza soon wrote that Paycoin was flawed and would not work:

Our entire paybase and xpy model is flawed. It has been to begin with. The crazy thing, no a single person or just has ever brought it up. Here is why. Let’s separate things in to two buckets.

The first is people that buy xpy directly from Paybase at the full price of $20. We would need to escrow every penny of that right? Because that person would want liquidity for every penny because they paid full price. Right? Makes sense. Only that means we never can use that money.

Now that not the issue. The issue is way worse then that. As the above only means we would have to make money some other way. No, the issue comes next. Let’s assume the the following it true. For the next year, for whatever the reasons are, the price of xpy only goes up to 18 on the open market. Maybe it will go higher, but let’s agree that it’s out of our control and that’s the case.

So this would then mean, a person would be able to game us forever. They could go to the market, buy for 18 and come sell to us for 20 over and over and over again. Outside the limits we out in place, there is nothing we can do to stop that. This then also means we would constantly loose money from this. Now here is the scary part, combine the first thing i said. If we are escrowing all the new xpy they buy from us, where does the new money come from to cover that spread?

Now, multiply that by 10 million, and forever. Coming together now?

The entire model is flawed.

This is a big deal.

I am working on trying to figure out anyway around this. But the issue is the entire model is built around these concepts. I just can not believe I never thought of this before. There is no way this will work.

I will have amber call a meeting so we can talk about what options we have.

Like Litecoin GEAR we believe the evidence shows that GAWMiners started out providing legitimate hosted mining but soon transistioned to fractional-reserve mining later abandoning any pretense of verifiable mining. The company then attempted to remain profitable through the introduction of Paycoin. Many promises of functionality for Paycoin were promised but never delivered.

As in any successful scam, early investors made profits but those who invested later in 2014 or this year have seen their investment in Paycoin turn into pennies on the dollar. Mr. Garza and GAWMiners is under investigation by many US agencies as reported by Coinfire and all developers and most staff were fired in March 2015. Class-action lawsuits against Mr. Garza and GAWMiners should not be far in the future, one user at the GetHashing Forum is already organizing one see my post on the potential class action lawsuit against GAWMiners.