The Collapse of Huohuo: How a Fund Became a Belief

This article is an original piece by Chain Catcher, authored by Wang Dashu.

In recent years, numerous funding schemes have emerged, relying on blockchain and virtual currencies. A few months ago, Chain Catcher analyzed the Forsaga funding scheme based on Ethereum; this article focuses on another prominent funding scheme in China, the Huohuo Exchange, attempting to unveil the story behind Huohuo's rise and its current collapse.

"Do you know Huohuo is a funding scheme?"

"Yes, everyone who plays knows; it's just a gamble." Player Zhang Cheng (pseudonym) told Chain Catcher that for him, Huohuo is merely a tool for making money, just a game.

Zhang Cheng joined the cryptocurrency circle in 2018 and became part of the trading army. Most of his past trades ended in losses, but the funding scheme project Huohuo, cloaked in blockchain, allowed him to make a significant profit. In his eyes, Huohuo is the "Bitcoin" of funding schemes, a synonym for faith.

However, unfortunately, the so-called "Bitcoin of the funding circle," Huohuo, collapsed on November 29 this year, with almost all funding scheme tokens on the exchange plummeting by over 80%.

1. Before and After the Collapse

Huohuo is one of the funding schemes disguised as a blockchain financial project. Zhang Cheng still retains a video from months ago when Huohuo held a conference: the LED screen in the center of the venue displayed the slogan "Huohuo Blooms, Defining the Future." Nearly 100 people were present, all so-called believers, waving their newly claimed promotional task documents while standing up to sing along with the music, "We are a family, a loving family."

These participants came from different places and had various professions; most were well-dressed and appeared to live affluent lives. Here, they shared a common identity as Huohuo evangelists (leaders).

Huohuo provided these evangelists with rewards such as gold bars, travel, and regular salaries. With incentives and education running parallel, Huohuo's registered membership exceeded 200,000, and the platform token HDU's price soared from around 1 yuan to over 180 yuan at its peak, increasing by at least 180 times, making these figures dwarf most exchanges.

In fact, Huohuo Exchange is similar to conventional cryptocurrency exchanges; users can trade not only the Huohuo platform token HDU but also tokens issued by other funding scheme projects. The official focus is primarily on promoting the platform token HDU, which has a total issuance of 1 billion tokens, with the initial issuance of 10 million tokens, and the remaining 990 million tokens released in five phases.

Before the collapse, approximately 30 million HDU were circulating in the market. Based on the initial peak price of $26 per token, the market cap was around $780 million. HDU holders primarily profited through holding rewards and promotional rewards, with the official employing complex algorithms to ensure the project's sustainability.

The so-called holding rewards refer to "static holding" rewards, aimed at attracting investors through the appreciation effect of long-term investment. The so-called promotional registration rewards mean that users purchase the platform token HDU on the Huohuo platform and activate a promotional link relationship to become promoters. Promoters are also holders, enjoying dual rewards. This mechanism aims to attract more people and funds through a fission approach.

These tactics are no different from conventional funding scheme models, with the only difference being the promotional ability of the leaders (super evangelists), which determines how large the funding scheme can grow. In the eyes of frequent funding scheme player Chen Dafei (pseudonym), Huohuo's biggest advantage over other funding schemes is its effective leader training and its expansion of the target market from the southeastern coastal areas to the inland, thus broadening the fission range.

This regional expansion strategy in promotion aligns closely with the viewpoint presented in the earlier article "Crazy Funding Schemes" by the magazine Economic Knowledge. The report pointed out that funding schemes are mostly distributed in economically developed provinces, where the technology and financial atmosphere is rich, making it easier for people to accept new things, and the large middle-class population has certain investment capabilities.

Especially in coastal provinces, there are many small and medium-sized business owners who, despite having financial strength, face bottlenecks in development due to the broader economic environment, and the stock and real estate markets remain sluggish. They need to find ways for their funds, which is why many funding schemes set their headquarters in Beijing and coastal provinces.

Huohuo is one of the funding schemes headquartered in the Shenzhen area.

Veteran player Chen Dafei told Chain Catcher that at Huohuo's peak, over ten tokens were launched, most of which were funding scheme tokens. These tokens can be understood as a contracting system, with each project managed by a separate team and required to have an offline reception location. The token issuers need to purchase HDU as a listing fee, but after the listing, the market requires the project parties to promote it themselves. Among the more than ten tokens, Zhang Cheng's investment in NEU rose from around 1 yuan to 38 yuan, an increase of over 30 times.

Other tokens in the Huohuo trading area also mostly achieved dozens of times in gains, a level of return rarely seen in the stock market. Huohuo defined its position in the eyes of investors through this wealth effect. Participants like Zhang Cheng even regarded Huohuo as the "Bitcoin" of the funding circle.

His high regard for Huohuo stems from the funding scheme's adeptness at leveraging social hotspots, new policies, and economic trends. For instance, it capitalized on the Bitcoin craze with tokens like Treasure Coin and Dark Coin, and utilized distributed storage and new infrastructure concepts with CAI mining machines, as well as early internet finance and O2O models like Rent Treasure and Gather Treasure Finance.

However, the "Bitcoin of the funding circle" did not maintain its glory. Starting in November, all tokens on Huohuo began to decline, and it wasn't until November 27 that Zhang Cheng discovered he couldn't withdraw his tokens, but by then it was too late to cut his losses.

"This is my first time playing a funding scheme. I initially bought 40,000 yuan worth of NEU on Huohuo and later made over 400,000 yuan, at least ten times my investment, which was astonishing." Zhang Cheng told Chain Catcher that he later lost some of his profits in cryptocurrency trading, and to make up for those losses, he invested in another exchange linked to Huohuo, the Galaxy Trading Platform, with a token—UBT/RFB/FGO, etc. Unfortunately, this reinvestment coincided with the collapse, and his money went down the drain.

2. The Second Life of Radar Coin

Previously, Zhang Cheng believed that the mechanism of Huohuo made a collapse impossible because the person who introduced him to the industry had said that Huohuo launched a dynamic level and reward mechanism to sustainably motivate promoters, preventing them from losing their promotional drive.

"Death is possible, but I need to know how it happens." Zhang Cheng inquired about the details of the collapse, and friends informed him that the police had recently cracked down on funding scheme chaos, and Plustoken had been caught, leading to many funding schemes collapsing one after another. Not long ago, technicians from Singularity were also arrested because Singularity and Huohuo's technology came from the same company, creating a chain reaction.

For veteran player Chen Dafei, this was all expected. He told Chain Catcher that once a funding scheme project starts holding large conferences and the token price suddenly rises or falls sharply, investors need to be cautious, as it may be a precursor to a collapse. "Huohuo will either run away or be caught; a collapse is just a matter of time. What the outside world doesn't know is that after Singularity's incident, Huohuo's upper management gradually went overseas."

Chen Dafei revealed that Huohuo's boss, Li Mingxing, came from the Radar team, and the systems of Huohuo Exchange and Singularity Exchange were both developed by Shenzhen Leishan Technology, whose members also originated from the early Radar team. The company has since ceased operations.

Moreover, not long ago, some media pointed out that as the market approached saturation, the operational space for the Radar Coin founding team shrank, and to continue attracting funds, they launched Huohuo. To some extent, Huohuo is the second life of Radar, succeeding by replicating the Radar Coin model while leveraging the early profits of Radar to give Huohuo participants a reason to invest, creating a nested operation that attracted many promotional teams that had previously exited Radar Coin. Additionally, it is worth noting that the Radar Coin wallet's splash screen advertisement had openly directed traffic to Huohuo Exchange.

Radar Coin is not unfamiliar to those involved in the funding circle; it is also known as Radar, with the token VBC. According to Baidu Zhidao, it is an internet financial tool (equivalent to an internet bank) established in 2014 that helps users make payments, transfers, and global currency exchanges simply, quickly, and at low cost.

The introduction also states that Radar Coin (VBC), like Bitcoin, is a truly virtual currency launched by the American Radar Laboratory, with open-source code, and belongs to the same blockchain technology as Bitcoin, being a collaboration between the Radar Laboratory and "China's central enterprise Datang Telecom" to launch the Open Yuan Tongbao trading platform.

However, in reality, Radar Coin was long ago classified by the state as a new type of currency pyramid scheme, with its sale and promotion being illegal activities. Chen Dafei told Chain Catcher that those familiar with Radar Coin know that this model will not collapse; on one hand, participants have a strong belief, and on the other hand, it can easily change its shell, like an immortal centipede.

Chain Catcher found that Radar Coin is not the first generation of funding schemes; it has a predecessor—Vpal, abbreviated as V Treasure, which was exposed by the media in 2014 for suspected pyramid schemes. The transition from V Treasure to Radar is similar to the transition from Radar to Huohuo, both involving the sale of pyramid scheme coins, fundamentally being Ponzi schemes.

The essence of a Ponzi scheme is to use the investments of later investors to pay returns to earlier investors, and so forth, leading to an increasing number of participants and funds. Theoretically, a Ponzi scheme can roll on indefinitely, but in practice, the number of investors and funds is limited. When the funds become unsustainable, the scheme will suddenly collapse.

Currently, Huohuo has been in a state where withdrawals are impossible for over a month, yet there have been no large-scale rights protection events. Zhang Cheng told Chain Catcher that although at least 80% of investors are losing money, the consensus around Huohuo remains strong, and the wealth effect is significant, with most investors still holding faith in Huohuo. Currently, many people in the over-the-counter trading group are still frantically collecting USDT from Huohuo accounts.

3. Why Do Funding Schemes Become a Belief?

"A large amount of Huohuo USDT is being sold; the price is negotiable to your satisfaction, come if you need." This is an advertisement frequently seen in an over-the-counter trading group this week. Interestingly, since the news of Huohuo's collapse broke on November 29, the trading group has seen a shift from a large amount of buying Huohuo USDT to a large amount of selling Huohuo USDT. This contrast corresponds to the diminishing expectations of HDU holders for Huohuo's recovery. "They still hope Huohuo can recover and are trying to buy the dip, but brother, let me remind you, don’t step on the landmine; the end of the year is tight, so it's better not to participate." Zhang Cheng's friend advised him.

After observing the trading group for several days, Chain Catcher found that although there were constant advertisements for buying and selling, the group remained largely ignored. After contacting a buyer who was collecting Huohuo USDT, the other party stated that they were merely an intermediary, and the real buyers were those elderly individuals who had faith in the Radar Coin series of funding schemes.

The intermediary also revealed that the information in the trading group was mixed, with most people being shills, and hardly anyone was genuinely buying. "To be honest, I’m just making some pocket money; it’s those old men and women gambling. They made quite a bit of money from Radar Coin before, they understand Huohuo's model, and they believe in this scheme, so they don’t mind putting some money out to buy low-priced chips." This intermediary stated that the current price of Huohuo USDT is 1.35 yuan, having dropped 90% from its pre-collapse price, and it will only continue to decrease. Those so-called believers will inevitably suffer significant losses in the end.

The so-called believers mentioned by this intermediary share a common trait—greed.

The reason these elderly individuals believe in Radar Coin is fundamentally due to the high returns they previously obtained from it. Radar Coin went online in 2015, with its price peaking at 580 yuan per token, a rise even greater than Huohuo's hundredfold increase. Even without earning promotional rewards, just the static rewards from holding tokens were higher than bank interest.

"Playing funding schemes is similar to trading cryptocurrencies; you have to first assess whether the team is capable, whether the market promotion strength is strong enough, whether the consensus is sufficient, and whether it can attract capital. Once these are confirmed, you can bet on when this token will explode. Funding schemes are the same; as long as the consensus is strong enough, anything can be achieved. For example, Huohuo's HDU can be used for consumption at some merchants; how many tokens in the crypto circle can do that?" Zhang Cheng said that most people in the crypto circle are just online acquaintances, very illusory, but in the funding circle, they frequently hold offline conferences, which not only strengthens faith but also allows them to meet more people.

Investors like Zhang Cheng are not alone; the magazine Economic Knowledge previously mentioned typical cases of funding scheme victims.

In 2015, investor Mai Sui was persuaded by friends to invest in a project called Baichuan Coin. After more than a month of trial, she made a small profit. Mai Sui said this model subverted her previous understanding of investment and finance. After tasting the sweetness, she began to heavily invest in Baichuan Coin. However, within two months, news broke that the Baichuan Coin company was under investigation and its executives were detained.

After that, Baichuan Coin investors quickly split into two factions: the steadfast faction and the rights protection faction. The steadfast faction believed it was a competitor's conspiracy, and that Baichuan Coin would continue to develop after overcoming the difficulties; the rights protection faction believed Baichuan Coin was a scam and a pyramid scheme, calling for everyone to unite for rights protection.

Mai Sui chose the steadfast faction, fantasizing that Baichuan Coin could continue to develop, hoping to recover her principal. However, this fantasy ultimately shattered when the court ruled that the Baichuan Coin team was sentenced to thirteen years and six months in prison and fined 20 million yuan.

Zhang Cheng's thoughts are similar to Mai Sui's; they both know that funding schemes are scams but still harbor speculative and lucky thoughts. Whether it is Huohuo, Radar, or the participants mentioned in the article, they are all driven by greed for profit, which is also a perpetual weakness of human nature.

Returning to the over-the-counter trading group, advertisements for buying Huohuo USDT continue to flood the screen. "Are you selling today? Think carefully; if you drag it out, it might really be worthless." After asking the intermediary a few questions, Chain Catcher reporters continued to receive transaction prompts from the intermediary for several days.

However, now Zhang Cheng and many players around him have long exited the over-the-counter trading group and downloaded a new exchange app, "It’s said to be Huohuo's new shell."

Reference: "Crazy Funding Schemes"—Economic Knowledge Journal, Issue 9, 2016.