CRYPTO CON

Bitcoin Lenders Take the Money and Run During Crypto Crash

People keep lending money to anonymous cryptocurrency dealers. Now that crypto values are plummeting, the dealers are vanishing.

Photo Illustration by Kelly Caminero/The Daily Beast

Lend us your money and you’ll have the chance to win $1,000,000, the cryptocurrency company Davor Coin promised users on Jan. 31. Optimists poured cash into the platform, but a week later all anyone had was a cease-and-desist letter from the state of Texas.

As cryptocurrency values skyrocketed in the final months of 2017, some enthusiasts took out loans to buy the digital money. Others invested in lenders like Davor Coin, which accept real money for “interest” paid out in fringe cryptocurrencies. The lending scheme works as long as the cryptocurrency values keep rising. But cryptocurrency values are crashing, and lending companies are cutting and running with the cash, or getting slapped with cease-and-desist letters from government regulators alleging securities fraud.

A week before its closure on Wednesday, Davor Coin was flying high.

“WELCOME TO THE ‘BE A MILLIONAIRE’ LENDING LOTTERY !!!” the company screamed in a Medium post. “We will offer an amazing $1,000,000 to someone from the Davor community and many more prizes!”

All users had to do was loan Davor Coin their money. Even if customers didn’t win the million-dollar jackpot, Davor Coin promised them huge returns on their loans, in the form of the company’s own kind of cryptocurrency.

The investment might have been a gamble for buyers, but for Davor Coin it was almost a surefire money-maker. At least one study suggests that buyers of cryptocurrencies like bitcoin are comfortable entering loan schemes for the digital money, which they believe will soar in value.

In a December survey of bitcoin buyers, more than 18 percent of respondents said they had borrowed money to purchase bitcoin. Of those who bought bitcoin with borrowed money, 22 percent told the research group LendEDU that they had not paid off the debt. Of those bitcoin fans who did not pay off their bitcoin debts, more than 70 percent said they agreed with the statement “I believe owning Bitcoin is worth the interest expense.”

Cryptocurrency forums are rife with discussions like this one, where a user boasts of taking out a title loan on his Honda to buy cryptocurrency, which he expects to increase in value until he can buy a Lamborghini. Meanwhile, companies like Shift Cash advertise cryptocurrency-based title loans for cars.

More than 70 percent said they agreed with the statement ‘I believe owning Bitcoin is worth the interest expense.’

It’s a buyer’s market for people willing to spend money they don’t have on digital currencies that might be worth nothing next week.

Davor Coin also had another reason to be optimistic. Two weeks before the company announced its million-dollar jackpot, one of its biggest competitors folded.

Bitconnect, one of the largest crypto-lending companies, had long been accused of being a Ponzi scheme for its aggressive marketing that encouraged customers to recruit other users. The company’s management was completely anonymous. They promised a 1 percent daily return on investment, which experts derided as impossible.

Red flags aside, investors kept loaning Bitconnect money until the Texas State Securities Board and the North Carolina secretary of state sent the company cease-and-desist letters in early January, accusing the company of securities fraud. On Jan. 16, Bitconnect announced it was shutting down, blaming “continuous bad press has made community members uneasy.”

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The value of Bitconnect’s cryptocurrency fell through the floor, resulting in people like this Reddit user who claims to have taken out a $500,000 business loan and loaned most of it away to the now-defunct crypto company.

But instead of acting nervous over Bitconnect’s closure, the near-identical Davor Coin celebrated. “This does not change anything for us,” Davor Coin wrote of Bitconnect’s closure. Davor Coin had just become “the largest lending platform in the world !!”

The boasts caught the attention of the same Texas authorities who issued a cease-and-desist to Bitconnect. On Feb. 2, Texas sent Davor Coin its own cease-and-desist, asking it to stop selling in the state until it registered as a securities firm.

Five days later, Davor Coin announced it was shutting down its loan platform. Customers were left with nothing but the mostly defunct company’s cryptocurrency, which plunged from its peak value of $177 per coin to less than 1 cent per coin.

Buyers took to Facebook to announce their losses. One, who had loaned the company $4,000, was left holding $9, he said. Another complained of loaning Davor Coin $20,000 and receiving the equivalent of $23.50 when he tried to cash out.

But as swindled investors lamented their losses on Twitter, other crypto companies rushed to take the place of the two previous lending scams.

“Good announcement for you guys,” a Twitter user with no profile picture tweeted at dozens of people who complained of losing money to Davor Coin. The “good announcement” was an advertisement for a new cryptocurrency lending company launching on Saturday.