Large Bitcoin Ponzi Scheme Collapses With a Loss of $5.6 Million 327
New submitter beltsbear writes "Despite the many people calling it out as a Ponzi scheme from the beginning, Pirateat40 was able to collect millions of dollars worth of Bitcoins from thousands of Bitcoin users. At almost every stage Pirateat40 copied the path of the EVE Online Ponzi scheme except on a much larger scale with a far more liquid take. Now, it has shut down, and investors are wondering where their digital currency went. Quoting: 'He claimed that BS&T was sitting on 500,000 BTC on the day of the shutdown, worth more than $5.6 million USD at today's price of $11.38. "Once my process is released you'll understand more of how coins move around," he told members of the Bitcoin community last week. Pirateat40 initially promised to refund his investors' Bitcoin deposits plus interest within a week, effectively admitting that he did not have the Bitcoins on hand. The fund normally paid out on Mondays, but last Monday and today have passed so far without refunds. BS&T investors are complaining loudly and so-called "pass-through" funds that invested with BS&T are shutting down. As of this writing, BS&T says there is "no ETA on payments."'"
Not really about Bitcoin (Score:5, Informative)
Every time there's a BitCoin story, people loudly claim it's a Ponzi scheme. Maybe they're right.
But it's worth pointing out that this story is not the story that vindicates that claim. This is a story about a Ponzi scheme that happens to have been conducted using Bitcoins.
To claim that this shows Bitcoins are a Ponzi scheme is like saying that C is a virus because you can write virii using C.
It might be the case that this Ponzi scheme couldn't have been conducted using (say) US$ because of financial regulation. Lack of financial regulation attracts some people to Bitcoin -- but look how it can bite.
Re:"members of the Bitcoin community" (Score:2, Informative)
Not everyone is a paranoid bigoted bastard like you. Most people rarely encounter con artists and thieves, online schemes like this even less. So, not being knowledgeable in how to steal other people's money, doesn't not make one an idiot.
Besides, it could have happened in any other currency. No, correction, it HAS happened in every other currency a lot of times, and when enough time passes, it will happen again.
Re:Not really about Bitcoin (Score:5, Informative)
To claim that this shows Bitcoins are a Ponzi scheme is like saying that C is a virus because you can write virii using C.
"virii" is not a word. The correct plural of "virus" is simply "viruses".
Re:Not really about Bitcoin (Score:5, Informative)
Or maybe they're just spewing buzzwords without understanding what they mean. Bitcoin itself is not a ponzi scheme and that's obvious to anyone with a dictionary. A ponzi scheme is a scheme where "investors" are paid from deposits from new investors. Obviously such a scheme must always grow in order to make payments and that means it is guaranteed to eventually collapse. As nobody sane would invest in something that explicitly advertised itself as a ponzi, such schemes always involve secrecy and obfuscation.
Bitcoin, being a currency, is not an investment (although some people may be tempted to use it that way). It does not claim to offer any particular returns. There is no secrecy or obfuscation, you can read the papers and check the code to see exactly what it's doing.
Given that by the time the SEC forcibly closed ZeekRewards [ibtimes.com] it was reported to have had over a million investors and $600 million at play, I think it's safe to say that regulation is not a guarantee against getting scammed. At any rate, Bitcoin is not unregulated. If you're running an investment scheme in the USA you'd be required to register with the SEC regardless of currency used, and in fact one unregistered Bitcoin investment scheme operator in Brazil was already fined by the Brazilian equivalent for failing to do so.
Re:No sympathy (Score:5, Informative)
you little kids miss the clues, doing too much pot in the van with shaggy does that to you...
Pirateat40 = Pirate at 40 or a Jimmy buffett song. the guy is a Jimmy Buffett fan, therefore an old guy.
Re:The chocolate game (Score:2, Informative)
Business can only use the capital obtained by IPOs or when new shares are issued. The vast majority of shares transactions don't provide the companies any funds.
Re:Is Bitcoin trace-able ? (Score:4, Informative)
Yes, and that's exactly the same what this scheme promised: let me control your bitcoins for a while and you'll get them back later - with intrests.
So this alone was no criteria for recognizing a scam.
The clue is "with interest vastly in excess of market levels".
The higher the promised interest, the less plausible it is. (Yes, I don't find hedge funds particularly plausible).
Re:It's About the Unique Features of BitCoin (Score:3, Informative)
No, that's (yet another) gross and dangerous misunderstanding that gets repeated in the internets echo chamber.
Securities laws do not have some magic exception for Bitcoin. If you are running an investment scheme you're supposed to register and follow those laws. Now we can argue how useful these regulations are, but they certainly do apply to this scheme by "pirateat40". But saying Bitcoin has "no government regulation" just distorts reality. MtGox follows the AML/KYC regulations and if somebody wants to run an investment scheme they would need to follow their countries securities regulations. As I mentioned in another post, a Brazilian guy already got fined for not doing so.
I find this argument fascinating because it actually doesn't apply to Bitcoin, though I suspect you don't realize why. Firstly, you don't have to invest in shady "funds" in order to use Bitcoin. Using the currency does not imply using investment vehicles so it's quite possible for idiots to use it, though I'd not recommend it just due to the general immaturity of the software. So - your logic is simple but wrong.
It may not be immediately apparent that your logic is wrong because with currencies like USD and EUR, using the currency does practically (if not theoretically) require investment due to rampant inflation, so if you don't invest then your savings shrivel up and die. The absolute, hard requirement to invest rather than save means everyone (idiots included) ends up giving all their money to third parties who claim to be able to beat inflation. So regulation of these third parties does make a lot of sense.
However Bitcoin has limited and predictable inflation which eventually stops entirely, so (in theory) it's quite possible to just build up savings. With a stable monetary base the value of your savings basically tracks overall change in GDP. If the economy grows at 2% per year, the value of your savings does too. No investment required, though obviously nothing stops you investing if you want to try and beat general economic growth.
By the way, don't put too much faith in regulators. They don't have a great track record and there are worse things to come. For instance, go check out the web site of a typical hedge fund [brigadecapital.com]. Observe it is virtually empty. The reason is that the regulations say you have to publish information about your investment strategies if and only if you solicit for customers. Hedge funds do not solicit (hence the empty websites) so they can keep their strategies secret, which is one reason they can make a lot of money. So where do they get their customers? Well, a lot of personal contacts and backroom deals, very often with pension funds. Pension funds are supposed to be conservative and heavily regulated, which they are, but to get the returns they need to outrun inflation they have actually ended up just putting their money into unregulated entites - effectively acting as proxies.
Re:Is Bitcoin trace-able ? (Score:3, Informative)
If it wasn't for idiots, the economy would have tanked thousands of years ago. No politician could ever get elected into office. It would be anarchy. Idiocy, and money make the world go 'round.
Re:Is Bitcoin trace-able ? (Score:5, Informative)
How do you make interest on a currency that is that fixed?
The same way you make interest on any currency.
You put $10 in the bank. The bank gives me $10. I spend that $10 on tending an apple tree. I sell the apples for $14. I pay back $12 to the bank (20% interest) and keep $2 for myself. The bank adds $1 to your balance (10% interest) and keeps $1 for itself.
Re:It's About the Unique Features of BitCoin (Score:5, Informative)
However Bitcoin has limited and predictable inflation which eventually stops entirely, so (in theory) it's quite possible to just build up savings. With a stable monetary base the value of your savings basically tracks overall change in GDP. If the economy grows at 2% per year, the value of your savings does too. No investment required, though obviously nothing stops you investing if you want to try and beat general economic growth.
I've rarely seen so much wrong rolled up into a few sentences. Inflation means that the purchasing power of your money goes down over time, the quantity of Bitcoin is known but the value is not so saying it has a predictable inflatioin is just ridiculous. Yes, printing of money is one of the things causing inflation but far from the only one. Like you say in the next sentence, the purchasing power will continue to change also after all Bitcoins are assigned an an increasing value we'd call deflation - it's just negative inflation. But let us talk closer about the steady stead.
With a steady state, whoever owns Bitcoins own a fixed fraction of the total Bitcoin economy - not to be confused with the GDP of any country or the world. If you own 1% of the Bitcoins, you own 1% of the economy whether that's worth a million, a billion, a trillion or nothing at all. So if 10 times as many people want to use Bitcoins, all the existing money will be worth 10 times as much. If 90% (leaving 1/10th) leaves, your money will drop to 1/10th of the value.
Actually it's worse than that because most of the Bitcoins are not liquid, In order to be able to buy Bitcoins somebody must be willing to sell them, and already today most of them are hoarded. What it means is that the people who actually want to use Bitcoins are buying and selling from an even smaller pool of money, the whole actual economy must fit within just a fraction of the total Bitcoins. And it gets very susceptible to flash crashes if the hoarders stampede, on top of the chance that people abandon the currency.
Either way, the system keeps getting stuffed with more and more "old money" which means you have to be crazier and crazier to invest as you get less and less Bitcoins for your dollars while the existing Bitcoin owners profit from deflation. The early adopters have the most to gain and the last ones in most to lose, eventually new people will cease to join and the panic will start in the other direction as the Bitcoins only have value as long as anyone else accepts Bitcoins.