Thinking about how to invest in Bitcoins? You might want to wait a little while. While the virtual currency made headlines earlier this year for unprecedented growth in market value, Bitcoin is making headlines again — this time for more sinister reasons.

The Securities and Exchange Commission (SEC) recently busted an alleged Ponzi scheme valued in the millions. So what is Bitcoin and why is the SEC making a big deal out of the virtual currency’s first Ponzi scheme? Let’s find out.


So What is Bitcoin?


Bitcoin is a virtual currency bought and traded online. Think of it as a global currency that circumvents national currencies like the dollar or the euro.

Developed by an anonymous hacker, the virtual currency allows worldwide payments with extremely low processing costs. This means no excessive bank or balance fees.

It’s been embraced by a wide variety of consumers online and off, and recently came into the public eye thanks to a well-publicized market surge.


The Famous Bitcoin Market Surge

Earlier this year, demand for Bitcoins soured and pushed the market value up to $266 per coin. The meteoric rise was all over the news and brought Bitcoins into the mainstream.

Why was there a rapid rise in market value? CNN Money chimes in:

Demand for the currency surged earlier this year, pushing its value as high as $266 per bitcoin, following the unprecedented financial rescue in Cyprus in which the government raided bank deposits in excess of 100,000 euros. The move sparked fears that government-issued currencies in other countries could also be at risk, pushing many to seek a safe haven with Bitcoin.”

A single Bitcoin is valued around $95 today. Ironically, had the scammed investors simply bought and held Bitcoins, they would be rich — Bitcoins were valued around $6.56 on average during September 2011 and September 2012.

So what happened in the ponzi scheme?


Virtual Currency’s First Ponzi Scheme

Trendon Shavers, a 30 year old from McKinney, Texas, went old-fashioned when he began collecting investors for Bitcoin. From September 2011 to September 2012, he raised more than 700,000 Bitcoins from investors valued at $4.6 million.


What do Bitcoins mean for traditional currencies like the dollar or the euro?

Like any Ponzi scheme, Shavers promised high return rates on investments and used new investor funds to pay the return rate. He promised investors up to 7% in interest per week.

Bitcoins may be valuable today, but the return and growth on investments promised in this case is simply impossible without something shady going on in the background. Unfortunately, Shavers’ investors weren’t so savvy.

Andrew Calamari, director of the SEC New York office, told CNN Money that this was their first case involving Bitcoin.

Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,”

Shavers is also accused of converting $147,000 worth of Bitcoins into dollars to cover personal finances.


Avoid Bitcoin Fraudsters

Virtual currencies are targets of scams and fraudsters because they’re supposedly more private and hidden away from government regulators. In other words, what makes Bitcoins appealing to many investors is precisely what makes them appealing to scammers, too.

As always, if you ever see something that’s too good to be true, walk away. And if you ever see a deal that promises up to 7% in interest per week, chances are that it’s a scam.


What Do You Think?

Do you invest in Bitcoins? What do you think of this new digital currency? Share your thoughts in the comments section!


See Also

How Pyramid and Ponzi Schemes Work
No More Bogus Benjamins: Federal Reserve Designs New Anti-Counterfeit $100 Bill
Don’t Get Scammed on Craigslist: 3 New Anti-Fraud Safety Tips


What do Bitcoins mean for traditional currencies like the dollar or the euro?


About The Author

Sean O'Connor is a writer and graduate from Loyola Marymount University. He is a self-described hoops fanatic who resides in Pasadena.

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