There are many lessons to be learned in the cryptocurrency world, and not all of them are good lessons, nor do they have good outcomes. Such as the case with one exchange called QuadrigaCX, which taught lots of investors a very expensive lesson.
QuadrigaCX was a cryptocurrency marketplace that collapsed in 2019 leaving investors out millions of dollars. The situation was investigated by the Canadian government, but the outcome, for several reasons, was not positive for any of the parties involved.
You need to be careful whenever you invest your money into an asset. If you want to learn what could happen if you were to choose the wrong investment and invest in it without research, keep reading.
What is QuadrigaCX?
QuadrigaCX was a Canadian based cryptocurrency exchange which was opened by Gerald Cotten in 2013. Many Canadian cryptocurrency investors incorrectly assumed that Cotten was registered with Canadian securities regulators as a financial institution. This turned out later not to be the case.
When the company began, they traded solely in Bitcoin and even offered a Bitcoin ATM in Ontario. It is believed that the company started out as a legitimate business, as there were originally four founders and shareholders. But when the company went bankrupt in 2015, all but Cotten resigned. Much of this was attributed to the dip that Bitcoin experienced during this time. By 2017, with Bitcoin again on the rise, Cotten was back in business. However, this time around, it would become abundantly clear that he wasn’t going to run the company on honest terms.
What Were the Results of the Investigation of QuadrigaCX?
After the marketplace crashed in 2019, the Canadian government launched a full investigation as it was estimated over $1.2 billion passed through the cryptocurrency exchange during the past couple of years. And what they found was astounding.
First and foremost, QuadrigaCX was run a bit like a Ponzi Scheme. Cotten would abuse the system to create multiple accounts for himself under other names. Then he would load those accounts with fake Bitcoin and Ethereum and trade with unsuspecting clients. This would leave the client with the fake cryptocurrency and Cotten with money. And as the Bitcoin price began to fall in 2018, clients came back looking to cash out. This meant that Cotten had to use money he was getting from other investments to pay out these people who never owned any real cryptocurrency in the first place. This caused the market to implode, and quickly.
The QuadrigaCX Ponzi Scheme was able to avoid detection for so long because Cotten was the only high-ranking employee of the marketplace. This means no one was overseeing what he was doing, and there were no internal checks. There was also no accounting, and Cotten would regularly spend the funds invested in his website on his lavish lifestyle, as well as on his own cryptocurrency trades on other websites. The company used various payment processors to accept money from clients, and now many of those payment processors are also under investigation for fraudulent practices.
By the time Cotten was caught, it was estimated that 76,000 investors had placed over $215 million onto the QuadrigaCX exchange, and sadly, most of this money would never be recovered.
What Happened to Gerald Cotten?
This is where the story gets even more unfortunate. While under investigation by the Canadian authorities, Cotten took a vacation to India in December 2018, where he subsequently is suspected to have died. He was accompanied by his wife, who says she checked him into the hospital where he succumbed to complications of Chron’s disease. The death certificate was not contested and the body was flown back to Nova Scotia.
The reason many people think that his death was fake and possibly an exit scam is because his will was only signed 12 days before his death. In the will, his wife Jennifer Robertson was left everything that he owned, and there was a trust fund put in place for the couple’s two chihuahuas. Not only that, but in January 2019 following Cotten’s death, the employees of QuadrigaCX were told to use the money on QuadrigaCX’s cold wallets to pay all of the customers on the exchange what they were owed before closing down.
The main problem that the employees encountered was that none of them had the private key to the company’s cold wallets. This is because Cotten kept this sort of information to himself as the only CEO. Although his widow was questioned, she claimed that she couldn’t find the key written down anywhere. It turned out not to matter however, because blockchain analysts checked the validity and balances of the wallets and found that most of them didn’t exist, and that there was no cryptocurrency in the ones that did. Analysts also examined the hot wallets that Cotten used on other exchanges to invest the money he was bringing in. But those wallets also proved to be empty. Because of all of these suspicious circumstances, a letter was sent to the government requesting an exhumation of the body in December 2019. To date, this has not occurred.
Did QuadrigaCX Customers Get Their Money Back?
Unfortunately, many of the investors in the platform did not get their money back. Much of this was because the money they invested had been sucked up into Cotten’s lavish lifestyle. And what remained was not enough to cover what everyone was owed. To make matters worse, during the court proceedings to decide how the money that was left would be divided, an employee working as a stand-in CEO of the company inadvertently sent the equivalent of over $300,000 to one of the cold wallets belonging to Cotten. Because they don’t have his private key, this money is now in accessible. In the end, only $46 million was disbursed to clients that should have received over $215 million.
How Can You Avoid a Ponzi Scheme?
A situation like the QuadrigaCX debacle is all too common in the cryptocurrency world. This is why you need to be very careful with where you invest your money. Below are some tips to help you avoid common scams.
- Always investigate the company you are investing your money in, whether this is a cryptocurrency or a marketplace itself. A company like QuadrigaCX with only one board member who is also the single CEO is a red flag.
- Check the legitimacy of all websites and apps you use for trading. Sometimes imposter websites can be made to look very close to the real thing.
- Always understand what you are investing in.
- Don’t believe any cryptocurrency giveaways.
- If it sounds too good to be true, it is.
- Never send cryptocurrency in order to receive cryptocurrency.
Even if you follow all these tips, it can still be difficult to avoid a scam like what happened in QuadrigaCX. This is one of the reasons investing in cryptocurrency is inherently risky. But don’t let this discourage you from investing, as there are many great cryptocurrency projects out there that are doing great things! Just be sure you vet every company you invest in very closely.