10,000 people bought into an elaborate Bitcoin pyramid scheme

GAW Miners and ZenMiner, both founded by Homero Joshua Garza, promised would-be investors the chance to get in on a massive Bitcoin mining operation. The basic idea is that investors would pay for computer hardware that would then mine the virtual currency. The digital currency mined would then be given back to investors.

The problem: Very few computers were ever actually brought online to do the mining, according to an SEC press release on the matter.

“Investors were misled to believe they would share in returns earned by the Bitcoin mining activities,” says the release, “When in reality GAW Miners directed little or no computing power toward any mining activity.”

This isn’t to say no investors were paid — many thought they were getting returns from the operation. But all of that money came from later investors, making the entire operation was a pyramid scheme with a little bit of Bitcoin flavor. The SEC says most investors never got their full investment back, with only a few making any sort of profit.

It’s easy to think of this as yet another reason to avoid Bitcoin, and we’re sure media outlets will report this story as such. But at its heart, this scheme has less to do with Bitcoin and more to do with old-fashioned deception.

“As alleged in our complaint, Garza and his companies cloaked their scheme in technological sophistication and jargon, but the fraud was simple at its core: They sold what they did not own, misrepresented what they were selling, and robbed one investor to pay another,” said Paul G. Levenson, director of the SEC’s Boston regional office.

Investment, online and off, is risky — make sure you only work with people and institutions you know you can trust.