Multiple parties involved with BitConnect, a former cryptocurrency exchange, have been charged with multiple counts of wire fraud and securities fraud.
What is BitConnect?
BitConnect was a cryptocurrency company that raised as much as $2B to fund its own crypto coin called BitConnect Coin. Thousands of investors poured money into the coin based on the company’s promises of incredibly high returns on the coin.
The fall of BitConnect Coin was marked by a one-day price drop of over 90% in mid-January 2018. This led to several investigations against the company, its founders, and promoters.
The Securities and Exchange Commission (SEC) charged BitConnect founder Satish Kumbhani, promoter Glenn Arcaro, and several others with civil and criminal charges. Arcaro already pleaded guilty in federal court and admitted that he earned nearly $25 million in commissions by promoting BitConnect Coin.
According to the SEC, BitConnect allegedly promised investors that they could achieve returns as high as 40% per month. If true, this is fundamentally problematic for investors.
In the investment world, it is quite an accomplishment simply to beat average market returns. This return has hovered around 8% on average for the past several decades. Thus, when a company suddenly claims to promise 40% returns, investors should be immediately suspicious.
Risk vs. Reward
Although some investors have made incredibly high returns in the crypto market, it does not come without risk. Cryptocurrency is historically volatile and not appropriate for all investors. In this example, BitConnect traded as high as $460 per coin and fell to less than $5 per coin within one month.
Although this is an extreme case of volatility, this is not out of the ordinary for the crypto market. Bitcoin, perhaps the most popular and trusted cryptocurrency, still experiences huge price swings at any given time for no apparent reason.
Risk and reward are often correlated with each other, meaning low risk will normally yield low returns, while high risk will normally yield high returns. Based on this fundamental principle of finance, low risk rarely yields high returns. However, high risk may certainly lead to an entire loss of the investment.
This is a key point to remember before putting money into any investment. If a promoter promises that your money is safe while also promising incredibly high and unrealistic returns, red flags should be raised immediately. Keep an eye out for these suspicious promises when companies and its promoters stand to gain from your investment.