Fraud Risk Assessment: GenerateBTC

GenerateBTC Cloud Services
  • Editor Rating
  • Rated 1 stars
  • 20%

  • GenerateBTC Cloud Services
  • Reviewed by:
  • Published on:
  • Last modified: February 7, 2015
  • Investment Fraud Likelihood
    Editor: 100%

GenerateBTC is a recent Cloud Mining start-up which opened to the public in December 2014. The company’s legitimacy has been evaluated based on the items listed below. Every individual item has been checked for the presence of obvious red flags or warning signals. If these are present, an explanation detailing what triggered them has been included. A detailed description of the reasons to evaluate each of the included items can be found below the table.The company has a maximum investment fraud likelihood, for which the details are discussed hereafter. Readers who are familiar with fraud risk assessments by Digiconomist may skip immediately to the results.

Returns

To recognize a potential scam, and a Ponzi scheme in particular, the U.S. Securities and Exchange commission (SEC) warns to look out for high returns with little to no risk or even guaranteed returns. This follows from the risk-return trade off; the principle that potential return rises with an increase in risk. A guaranteed return does therefore not exist, and will automatically add 100% to the investment fraud likelihood determined.

Most of the time, Ponzi schemes will not be that explicit in their investment offers, but will offer disproportionate returns relative to the low risk nature of Cloud Mining services. In fact, “the most common telltale sign of a Ponzi scheme is the high rate of return offered to investors“. This is done not only to attract new investors, but also to get the existing participants to reinvest their money. As long as reinvestment rates remain high, the collapse of a Ponzi scheme will be relatively slow.

If it can be established that a Cloud Mining service offers a disproportionate return, then it will add 50% to the investment fraud likelihood determined in this review. Since a case of (severe) mismanagement cannot be ruled out based on returns alone, several other criteria should still be present. It should be noted that mismanagement cannot be classified as investment fraud, but may still lead to bankruptcy. As a disproportionate return  is less explicit than a guaranteed return, the methodology to determine this is outlined below.

Methodology

In general terms, the value of a Cloud Mining contract should be equal to the discounted expected future cash flows of the underlying mining equipment. Whatever expected return remains on top of this amount should be considered a risk free excess return. This would imply that the contract is sold below the market value, which is a poor business strategy under normal circumstances. To avoid discussion, Digiconomist only considers excess expected returns compared to a stressed (negative) scenario. A disproportionate return is defined as an annual expected return on investment (ROI) greater than zero under a stressed performance.

The assumptions for the stressed scenario are as follows:

  • The Bitcoin network hashrate increases at a daily rate of 0.82% equal to the historic exponential trend over the last year, meaning that the hashrate will be 20 times higher in one years’ time.
  • The network difficulty adjusts on a daily basis, preventing blocks to be mined faster than their target time despite the continuously increasing hashrate.

Results

Before it is even possible to consider the potential performance of a certain product it is required to know what can be bought. This immediately causes a problem, as GenerateBTC does not clearly state whether they are selling lifetime contracts or something else. It is one of the many confusing items with regard to the company’s terms. It is assumed that it concerns lifetime contracts or at least a duration of one year or more.

For GenerateBTC the expected performance of renting 5.5 TH/s priced at just 2.75 BTC is shown below. For comparison, the expected performance of (one of the most powerful available miners) a 5.5 TH/s SP35 Yukon Bitcoin Miner priced at $2,235 has been included.

GenerateBTC Stressed ROI

The graph shows that this contract is priced extremely cheap either way and therefore offers a highly suspicious ROI. This can be marked as a disproportionate expected return and adds 50 percent to the investment fraud likelihood of this Cloud Mining service. The site’s terms and public statements even seem to imply that it concerns a guaranteed return, which is sufficient to mark GenerateBTC as a 100% fraudulent service by itself.

Conclusion

If other criteria (shown below) that concern the presence of any actual mining equipment or known persuasive tactics by scammers are taken into consideration as well, then it leads to the conclusion that GenerateBTC is a certain fraudulent service, or more specifically a Ponzi scheme given promised (guaranteed) returns. The company was publicly requested to provide evidence that it actually owns any mining equipment, but has failed to deliver despite promises to do so at the start of December. The only thing missing is “prominent applied persuasive tactics”, but given the limited English proficiency displayed on the website that should not be surprising.

GenerateBTC Fraud Risk

Disclaimer

Except for the return-based bonus criteria, the applied criteria mostly reflect those used in the Ponzi risk assessment by Bitcointalk forum member “Puppet”. Digiconomist has permission to reproduce and amend the content of this risk assessment, with the goal to raise both the accuracy and visibility of this important tool to assist investors in their investment decision. Neither Digiconomist nor “Puppet” is part of a commercial organization, or in any way involved with a Cloud Mining service.

The criteria “no exit strategy” was replaced by “prominent applied persuasive tactics“. This reflects the common tactics applied by fraudsters to influence their targets. This includes dangling the prospect of wealth, building credibility with special credentials, claims that other savvy investors have already invested and creating a false sense of urgency (scarcity).

Despite all the information provided, common sense is ultimately the best available tool in avoiding potential scams. Lastly, a service that is not a scam might still offer poor products and/or default due to mismanagement.