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Large Bitcoin Ponzi Scheme Collapses With a Loss of $5.6 Million
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 $11.38. "Once my process is released you'll understand more of how coins move around," he told members of the Bitcoin community last week. Pirateat40 initially promised to refund his investors' Bitcoin deposits plus interest within a week, effectively admitting that he did not have the Bitcoins on hand. The fund normally paid out on Mondays, but last Monday and today have passed so far without refunds. BS&T investors are complaining loudly and so-called "pass-through" funds that invested with BS&T are shutting down. As of this writing, BS&T says there is "no ETA on payments."'"
Every time there's a BitCoin story, people loudly claim it's a Ponzi scheme. Maybe they're right.
But it's worth pointing out that this story is not the story that vindicates that claim. This is a story about a Ponzi scheme that happens to have been conducted using Bitcoins.
To claim that this shows Bitcoins are a Ponzi scheme is like saying that C is a virus because you can write virii using C.
It might be the case that this Ponzi scheme couldn't have been conducted using (say) US$ because of financial regulation. Lack of financial regulation attracts some people to Bitcoin -- but look how it can bite.
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.
Do not look at laser with remaining good eye.
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).
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.
“He’s not deformed, he’s just drunk!”
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.
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.
Live today, because you never know what tomorrow brings