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."'"

Comments

No sympathy

[1u3hr]

But the guy for fraud, sure, but the "investors" were idiots.

Re:No sympathy

[slim]

"A real scammer would never put the word 'pirate' in his handle. Therefore this guy must be trustworthy..."

Not really about Bitcoin

[slim]

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:Not really about Bitcoin

[cgt]

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

[mellyra]

Every time there's a BitCoin story, people loudly claim it's a Ponzi scheme. Maybe they're right.

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 is not a ponzi scheme but it behaves similar to one - the increasing mining difficulty and limited overall amount of coins heavily rewards early adopters (who hoard their bitcoins) if and if only these early adopters can convince the latecomers that bitcoins actually have value (otherwise cashing out becomes hard).

Your ability to sell the bitcoins you mined at a low difficulty for ridiculous amounts of dollars later on is entirely dependent on the growth of the overall bitcoin scheme - and as bitcoins do currently have very limited value as use for transactions (few stores accept them, usually cheaper to pay in dollars than btcs if the stores accept them, high volatility makes accepting them difficult for business, people would be stupid to spend them giving their deflationary nature) the main motivation to get some bitcoins is to profit off the demand that will be created by those that want to get into bitcoin after you.

Re:Not really about Bitcoin

[Rogerborg]

just use "viruses" for FSM's sake

Fringe cultist demands use of biological weapons, news at 11.

The chocolate game

[georgeaperkins]

These 'too good to be true' schemes always take me back to primary school, when there was a letter going round: Free chocolates for everyone: Please send me 1 chocolate and then send this letter to 5 friends. Everyone gets 5 chocolates just for buying one. Amazing! I was so upset when my dad refused to buy me the one chocolate. How could he not understand!!! My friend who gave me the letter was equally outraged with me. Everyone around was getting free chocolates. Of course there were losers in the end. At least I learned an important lesson about schemes which seem too good to be true.

Is Bitcoin trace-able ?

[Taco Cowboy]

I know the title is ridiculous, but everything about this scam henge on it
 
Normal paper-based cash are almost un-traceable, that is why petty criminals often get to spend the cash that they robbed from old ladies
 
If Bitcoin is untraceable, then the masterminds behind this ponzi-scheme get to "spend" their ill-gotten loot as well, without being identified
 
I use Bitcoin, but I am not well verse with all the details
 
If I were to scam someone and got his Bitcoin, could I spend them, without being identified?

Re:Is Bitcoin trace-able ?

[eugene2k]

It's traceable, but it's not easy to trace. I remember there was a paper on the traceabilty of bitcoin transactions. Google it if you're interested.

P.S. If you were to scam ppl using bitcoin, right now you can probably get away with it, because complaining to the authorities won't help you in any way.

Re:Is Bitcoin trace-able ?

[Lumpy]

"Schemes that are only obvious to those that are educated on such things."

you mean like the super secret education that "you cant get something for nothing" and "a fool and his money are soon parted" ?

There have always been idiots, there will always be idiots. and as long as there are idiots, you will have crooks that take their money this way.

Re:Is Bitcoin trace-able ?

[Anonymous Coward]

Bitcoin Saving and Trust: "7% per week return. The operators methods cannot be disclosed. The operator is essentially anonymous."

The only education required for an honest person to hesitate from investing here is basic reading comprehension and the wisdom not to believe everything they read. If you lack either of these then please avoid Bitcoin until appropriate regulations have been applied, thank you.

Re:Is Bitcoin trace-able ?

[makomk]

The part you're missing is the brigade of shills on the Bitcoin forums who called anyone that pointed out that this was a Ponzi a troll and insisted that they were just too stupid to figure out how the operator of the scheme had managed to achieve such good returns. (Some of them even insisted that they knew how he was doing it, though they consistently refused to actually say.) Social conformity is a powerful thing; a lot of people are willing to put their concerns aside and do really foolish things so long as everyone around them is telling them that they're idiots for not doing them.

Re:It's About the Unique Features of BitCoin

[Kjella]

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.