Bitcoin scams have become a major nuisance online, costing investors around the world their life savings. One notable instance in which a man lost over $500,000 has become the subject of a new documentary on Netflix that explores his individual case and its context in the broader world of online Bitcoin scams.
Man Loses Everything to Bitcoin Scam
Tong Zou is the subject of the new documentary that details the story of how he lost over $500,000. The loss consisted of not only his life savings but an additional $200,000 from his parents as well. His crypto investments were held by Canadian cryptocurrency exchange Quadriga CX, which has since been revealed by reports to have been operating as a large Ponzi scheme.
The loss came when one of the co-founders of Quadriga CX, Gerald Cotton, passed away unexpectedly at the age of 30. He died in possession of a password that locked an offline cold wallet containing over $190 million in crypto held by clients on the exchange. Cotton was the sole holder of this password, and the decentralized and secure nature of crypto makes it impossible to retrieve any funds without that password.
Technical experts were contacted to attempt to retrieve the funds with access to Cotton’s laptop, but there was simply no way to bypass the protection. Following the loss of access to these funds, Quadriga CX initiated the bankruptcy process. Out of the $260 million owed to the exchange’s more than 76,000 clients, only $24 million was available for repayment.
Tong Zou had intended to use Quadriga CX as a means to avoid bank charges when converting over $500,000 from US dollars to Canadian dollars when moving from San Francisco to Vancouver. He purchased Bitcoin with those funds and subsequently sold them for Canadian dollars through Quadriga CX. However, he never received the funds from this sale.
He continued to communicate with Quadriga CX for months, making little headway into the issue. Then, the events of Gerald Cotton’s death and the following bankruptcy took place, and there was no hope for Zou to recover his lost money. The Netflix documentary explores this case in detail, along with the facts surrounding Quadriga CX.
Traditional Scams Find a Second Wind With Bitcoin
A report from a Canadian regulator, the Ontario Securities Commission, in 2020 revealed that Quadriga CX had been operating as a Ponzi scheme. This is a traditional scam that dates back to the 1920s with Charles Ponzi’s original system. In this type of scam, an investment opportunity is presented, but returns for investors are taken from new investors rather than from actual asset growth. There are similar reports about other types of get-rich-quick schemes like Immediate Edge which was exposed on a website named ScamCryptoRobots.com and specifically targets UK residents.
The general public’s lack of understanding of cryptocurrency and the ability of scammers to operate behind closed doors makes it a rich area for Ponzi schemes and other related scams. The fact that Quadriga CX wasn’t registered with any kind of financial regulator made it easy for the company to conduct its scam without anyone noticing. The fraud came at a time when crypto regulation was sparse in most countries, and large-scale scams could more easily avoid detection.
The revelation that Quadriga CX had been operating as a Ponzi scheme came after an exhaustive 10month investigation. This entailed going over trading records and blockchain transactions to determine what really happened. In the end, the report attributed over $115 million in client losses to fraudulent trading.
Bitcoin Scams Still a Major Threat Today
Major crypto exchanges face significantly more scrutiny today as regulatory frameworks are falling into place around the world. This makes large-scale scams like Quadriga CX less likely, but the danger presented by smaller-scale scams has never been greater.
Bitcoin and other crypto scams set a new record in 2021, with victims losing over $14 billion around the world. These losses weren’t from big crypto exchanges but rather individuals investing in scams presented as exclusive opportunities.
Social media and other websites are rife with ads that direct individuals to Bitcoin scams with promises of instant returns, automated trading, and more. Authorities struggle to combat these scams, which typically run out of foreign jurisdictions. Despite having more reliable methods to invest in crypto than ever before, online investors are still finding themselves victimized by Bitcoin scams.