Fraud Risk Assessment: CoIntellect

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

  • CoIntellect Cloud Services
  • Reviewed by:
  • Published on:
  • Last modified: February 6, 2015
  • Investment Fraud Likelihood
    Editor: 100%

Update February 6, 2015: CoIntellect is experiencing several issues with payment withdrawals. This is typical for a Ponzi scheme that is starting to collapse. Interestingly, CoIntellect gives some insight in its payout process stating that “payments are filtering and prioritized according to the frequency of requests from that particular user”. In other words, new users are more likely to get paid than old ones because they normally have less withdrawals. For a normal company this makes zero sense, but for a Ponzi scheme it is important to convince new users and get them to invest more. Once a user is heavily invested, it is more important to hold on to their money to keep the scheme alive.

Scrypt Cloud Mining company CoIntellect has already been the subject of a product review before, in which it was concluded that the service was highly suspicious. 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. As product reviews are not set up to identify potential scams, the service is now re-examined in a fraud risk assessment. In this assessment, CoIntellect has a maximum investment fraud likelihood. 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 Litecoin network hashrate increases at a daily rate of 0.88% equal to the historic exponential trend over the last year, meaning that the hashrate will be 24 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

For CoIntellect the expected performance of renting 50 MH/s priced at $1,160 (892 LTC) for a one year period is shown below. The performance based on the estimated daily payouts by CoIntellect for this contract has been included separately. For comparison, the expected performance of (one of the most powerful available miners) a 900 MH/s Scrypt Miner priced at $8,770 (6,746 LTC) has also been included.

CoIntellect Stressed ROI

The graph shows that the ultimate expected normal performance of this mining contract is well below the included Scrypt Miner. Both would normally perform terrible under stressed circumstances. Even though this result by itself would not be classified as a disproportionate expected return defined in the previous paragraph, the expected performance based on the estimated daily payouts by CoIntellect easily meets the criteria. Since CoIntellect can apparently deliver payouts at this level, this is therefore the actual offer and adds 50 percent to the investment fraud likelihood of this Cloud Mining service. It should be noted that a greater percentage would be justified given the massive gap between estimated payouts and performance of the underlying mining equipment.

Conclusion

If other, more straightforward, criteria (shown below) are taken into consideration as well, then it leads to the final outcome that CoIntellect manages to have a maximum investment fraud likelihood regardless. The conclusion is therefore that CoIntellect is an obvious fraudulent service, more specifically a Ponzi scheme.

CoIntellect 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.

Comments (4)

  1. Cristina February 12, 2015
    • Dave February 28, 2015
  2. mm notgood March 5, 2015
  3. Badbitcoin.org March 8, 2015

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