Bitcoin: Bitconnect Fears, Scams Crash Cryptocurrency Prices
Bitcoin and cryptocurrency prices deepened their weeks-long rout Wednesday as a spate of hacks and scam warnings compounded fears that regulators would crack down on the nascent digital assets. The price of Bitcoin crashed to well below $10,000, plunging to as little as about $9,200, down more than 50% from its highs a month ago.
Spooking investors was an announcement late Tuesday by Bitconnect, a popular but controversial site for trading and lending cryptocurrency, that it was closing down operations. Bitconnect had recently been accused of running a Ponzi scheme—the financial fraud most famously perpetrated by Bernie Madoff—by several influential investors, including Ethereum co-founder Vitalik Buterin and billionaire cryptocurrency investor Mike Novogratz. (The company didn’t respond to the accusations.)
Some Bitconnect clients interpreted the abrupt shutdown as confirmation of those suspicions, and worried they would not be able to withdraw their money if the exchange, whose management team remains anonymous, became insolvent. While Bitconnect, whose own digital token had risen to more than $2 billion in market value as recently as last week, promised that investors would be able to withdraw their funds at an average of the cryptocurrency’s recent exchange rate, doubts persisted. Bitconnect’s own cryptocurrency quickly lost as much as 90% of its value.
For several days this week, Bitconnect said it had come under a “continuous” cyberattack known as a denial-of-service, depriving customers of their ability to withdraw money. Following the shutdown announcement, some users continued to report problems when they tried to sell their positions. Now some Bitconnect investors, fearing they won’t be able to collect, are lamenting on social media that they’ve lost anywhere from a few thousand dollars to their entire “family’s savings.”
Indeed, the sudden halt of Bitconnect drew parallels to Mt. Gox, a major cryptocurrency exchange that shuttered in 2014 after losing virtually all its Bitcoins—largely through a massive hack, but also through the alleged embezzlement and mismanagement of its CEO. The Mt. Gox collapse precipitated a Bitcoin price crash of more than 70%, shaking investors’ confidence in the cryptocurrency for so long that it took Bitcoin more than two years to recover.
While many cryptocurrencies have been in bear market territory since a correction that began in late December, this week has been especially bloody for investors, with the Bitcoin and Ethereum prices down nearly 40% in the past two days, and Ripple shedding nearly half its value over the same period. By late Wednesday afternoon, the Bitcoin price had bounced back above $10,000 but still remained far below its peak of $20,000 a month ago.
Adding to the Bitconnect concerns was a crop of attempts by apparent scammers to take advantage of the confusion to trick users into handing over the contents of their cryptocurrency wallets. On Twitter, accounts that presented themselves as Bitconnect customer support but appeared to have been set up only after the service shut down, such as @BitconnectStaff and @BitConnectExch, seemed to prey on users desperate to get their money off the platform by suggesting they send all their cryptocurrency to a separate digital wallet address. Because such a transaction would be irreversible and difficult, if not impossible, to trace, observers quickly recognized the hallmark of a scam in which the senders would likely be diverting their funds to the criminals, never to see them again.
In explaining its reasons for closing shop, Bitconnect cited the relentless cyberattacks it was experiencing along with “bad press” and “cease and desist” letters it received from two U.S. securities regulators. The threat of governments cracking down on cryptocurrency trading has been a major driver behind the ongoing market selloff, with prices taking a dive after reports this week that regulators in China and South Korea were looking to ban cryptocurrency exchanges.
Although hacks and scams have plagued cryptocurrency exchanges worldwide, even afflicting leading platform Coinbase, the San Francisco-based exchange that has been likened to the industry’s “Goldman Sachs,” a new report this week also shone a light on the acute threat facing South Korea. Recorded Future, a cybersecurity firm, published an analysis Tuesday laying out evidence that North Korean hackers—the same group, known as Lazarus, blamed for the infamous hack of Sony Pictures Entertainment in 2014—were systematically targeting and plundering South Korean cryptocurrency exchanges.
Meanwhile, hackers used a different method of attack last weekend to steal $400,000 worth of the cryptocurrency Lumens, used on the Stellar digital payment system, from an online wallet service called BlackWallet. The wallet service has been offline ever since.