Wednesday, January 17, 2018

Bitconnect implosion will be one of many examples that will occur in the unregulated cryptocurrency market

Market regulation is a two-edged sword.  First it provides a modicum of confidence to investors that a given business or industry is following a minimum amount of rules when it comes to the products and services they sell.  However regulation also comes with a caveat as it can quickly be turned into a political arm that picks and chooses winners (IRS Lois Lerner scandal), or protects the government itself by changing the rules (Hunt Brothers - Silver) when one of their large lobbyists becomes affected.

So when the advent of the blockchain and cryptocurrencies came along, a portion of the public cheered because it meant that there was finally a platform and market that was going to be outside the purview of government, regulators, and manipulation.  The Wild West of pure naked capitalism had returned, and everyone was going to profit.

Not so fast.

When one looks back at history they will find that large portions of pure capitalist ventures and ideas ended up in fraud, theft, or insolvency, where investors lost most or everything they had.  And today whether you look at Mt. Gox, Youbit in South Korea, or now Bitconnect in the United States, unregulated markets are just as susceptible to corruption and insolvency as their regulated counterparts, only in their cases there is little recompense for the investor when they simply close up shop and leave them penniless.

Many in the cryptocurrency community have openly accused Bitconnnect of running a Ponzi scheme, including Ethereum founder Vitalik Buterin. 
The platform was powered by a token called BCC (not to be confused with BCH, or Bitcoin Cash), which is essentially useless now that the trading platform has shut down. In the last The token has plummeted more than 80% to about $37, down from over $200 just a few hours ago. 
If you aren’t familiar with the platform, Bitconnect was an anonymously-run site where users could loan their cryptocurrency to the company in exchange for outsized returns depending on how long the loan was for. For example, a $10,000 loan for 180 days would purportedly give you ~40% returns each month, with a .20% daily bonus.
Bitconnect also had a thriving multi-level referral feature, which also made it somewhat akin to a pyramid scheme with thousands of social media users trying to drive signups using their referral code. 
The platform said it generated returns for users using Bitconnnect’s trading bot and “volatility trading software”, which usually averaged around 1% per day. Of course profiting from market fluctuations and volatility is a legitimate trading strategy, and one used by many hedge funds and institutional traders. 
But Bitconnect’s promise (and payment) of outsized and guaranteed returns led many to believe it was a ponzi scheme that was paying out existing loan interest with newly pledged loans. The requirement of having BCC to participate in the lending program led to a natural spike in demand (and price) of BCC. – Tech Crunch via Zerohedge

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