Bitcoin pyramid scheme in Hong Kong makes off with $387M of investors’ money

A scam involving bitcoin in Hong Kong has robbed investors of HK$3 billion (US$387 million), according to the South China Morning Post.

MyCoin.hk, a small local bitcoin exchange, suddenly closed and boarded up its office last month. The company reportedly ran a pyramid scheme wherein as many as 3,000 local investors signed up for the promise of a HK$1 million (US$129,000) return on HK$400,000 (US$52,000) bitcoin mining contracts.

When Tech in Asia staff attempted to register an account on MyCoin to investigate, the sign up page returned an error saying the email has already been registered (it has not been). The mainland China phone number plays a recording of a nearly inaudible woman’s voice being drowned out by music.

To be clear, this is not the same scenario as Mt. Gox where thieves targeted assets of traders on the exchange. The calamity arose mainly from a lack of due diligence from investors.

"Mycoin was offering its customers to invest in mining contracts, promising them 300 percent year-on-year profits. It is really a basic case of Ponzi scheme, exactly like what Madoff had done for years in the US with more classical investments," says Aurélien Menant, founder of Hong Kong bitcoin exchange Gatecoin. "Investors were supposed to buy shares in mining rigs, and therefore get a proportional share of the returns of the mining activity."

"Mining" refers to the high-level computational process used to verify bitcoin transactions on a public ledger called the blockchain. In return for verifying these transactions and thereby securing the bitcoin network, miners are rewarded with new bitcoins. Mining on a large scale – such as what an exchange would need to meet the demand of customers – requires a huge investment in high-powered computer rigs.

See: Pick up your pickaxes and headlamps: here’s how Bitcoin mining works

It’s unknown at this point if MyCoin’s mining operation was ever active or if it simply pocketed investor’s money and used it to pay back investors further up the pyramid.

Investors collectively approached Hong Kong lawmaker Leung Yiu-chung about the situation, and they will file reports to the police on Wednesday, says SCMP. Each victim reportedly invested an average of HK$1 million. Besides the exorbitant return on investment, they were also lured by extra cash prizes and even a Mercedes-Benz car for investors who found new clients for MyCoin.

Real estate agents, law firm clerks, and insurance agents were among those reported as evangelists for the scheme. One elderly woman who says she invested HK$3 million (US$387,000) only recovered HK$1.2 million (US$155,000). The biggest loss by a single client is said to be HK$50 million (US$6.45 million). SCMP says some victims even mortgaged their homes to invest.

MyCoin staged events at luxury hotels and went on a roadshow in Macau, Asia’s biggest hotbed of gambling, sometime last year. It brought in investment professionals to speak at its events including Jim Rogers, SCMP reports.

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