Bitcoin Ponzi Scheme Exposed

(Editor note: This shift is from intangible, illusions of wealth to real tangible wealth.  If you don’t hold it you don’t own it.)

Investors lose $5 million USD in online hedge fund

Image from aronsky.ru

The decentralized, digital Bitcoin currency has caught the attention of people around the globe who are unhappy with how national bank mismanagement is impacting the world economy. It has also, apparently, caught the eye of one very clever schemer.

An invite-only online hedge fund that promised lucrative returns for investors called the Bitcoin Savings & Trust has shut down, and with it have disappeared the service’s administrator — a user known in the digital currency community as pirateat40 — as well as millions of dollars’ worth of the cryptocash, currently valued at around $11 USD per coin.

Pirateat40 claimed that Bitcoin Savings & Trust had collected from investors roughly 500,000 worth of the currency, or around $5.49 million in US dollars, but not before disappearing off the face of the Web. The virtual hedge fund went offline this month following pirateat40’s announcement that the site would be shutting down soon, but the investors that had their own Bitcoins tied up in BS&T say that they think the e-bankster in charge has bolted with their money.

When pirateat40 first announced the service would be shutting down, the administrator said, “The decision was based on the general size and overall time required to manage the transactions,” adding, “As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system.”

“On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits,” pirateat40 wrote in a post on the Bitcointalk.org forum last edited August 17. “In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.”

Pirate adds that the process of paying out his investors would be finished within a week, but ten days later the service’s clients claim that they have been duped. Investors have been so persistent for answers regarding the whereabouts of their money that pirate has put his online away message to read, “When I know, you will,” and has disappeared from the chat room set up to answer inquiries.

“You now have a very limited amount of time till the phone starts ringing. You may be in hiding, but others are not so well hid,” one user writes on the forum. “Do you really want to see how this plays out ? As of right now, I have about 2500 reasons to chase you down. Please don’t give me anymore.”

Another user of the message board believes that the person using the pirateat40 handle is really a Texas resident who has done business as both Trendon Shavers and Don Shrents, the latter of whom had previously registered an operation called Business Cognition, which billed itself as being able to use “the power of our client base to provide you with the tools and services required to both optimize your expenses and maximize your profits.”

Business Cognition also disappeared from the Web at the same time that BS&T did, leaving some investors saying pirateat40 is a digital world’s own Bernie Madoff.

“It’s game over, just a question of who wants to believe it yet,” Bryan Micon, a poker player and pirateat40 skeptic, says in an email to TheVerge.com. “He has been paying interest since late 2011, albeit a helluvalot more recently… it looks like he doubled the size of the scam from April until it went boom.”

Earlier this year, an unaffiliated website that exchanged Bitcoins for paper currency was hacked, leading to the loss of around $87,000 USD.

15 comments to Bitcoin Ponzi Scheme Exposed

  • marz

    Chris Duane was right.

  • Kyle

    Never trusted Bitcoin and neither should you.

  • Irving14941

    Yet, Max Keiser still champions bitcoin.

    Gerald Celente (CHECK)

    Max Keiser (CHECK)

    Alex Jones (CHECK)

    Ron Paul (CHECK)

    Who’s next?

  • eagleeye

    BrotherJohnF, who is big fan of Bitcoins, was comparing Bitcoins with Gold in his last video, saying how similier they are, what a joker. All these people claim the elite are trying to move us to a digital money & how it is wrong, yet they advocate Bitcoins. I realy have my doubts about some of these people!! I’ll rather hold $ (or in my case £) then Bitcoins & that’s saying something. Out of all the commentators, I think Chris is probably the most consistant & worth listening to.

  • Ben

    From Wikipedia

    Is Bitcoin a Ponzi Scheme?

    “In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.

    A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency.

    The fact that early adopters benefit more doesn’t alone make anything a Ponzi scheme. All good investments in successful companies have this quality.”

    LOL

    Yahhh…

  • dan

    I would expect the people of this forum to do more thinking before posting such strawman arguments against bitcoin or conflating a ‘fraud using bitcoin’ with ‘bitcoin is a fraud’.

    This exact same ‘ponzi’ scheme could have occurred using silver money.

    Early investors in ‘silver’ will profit more than late investors… you guys around here keep pumping silver when it is just another ‘commodity’, like bitcoins, that cannot be printed to infinity. Only silver cannot be transmitted over the internet.

    So use bitcoins as a currency and silver/gold as a store of wealth.

    Clearly bitcoins have no value without the internet/power, but while there is internet/power they have tremendous practical value.

    Gold and Silver also have significantly less value without a global ‘market’ or secure way of trading it and chances are that gold and silver will require a ‘digital’ banking system to handle the ‘micro-payments’ as even the smallest practical physical unit (constitutional dime) will probably purchase $100 worth of todays goods once things adjust.

    I can easily transfer $1m in bitcoins across the globe, but attempting to do that with silver…. I wouldn’t know where to start.

    All of your ‘silver banks’ will be subject to the same risk of fractional-reserve frauds that have happened throughout history. If you want a open, fraud-free, banking solution then bitcoin can deliver where silver cannot. At the very least a ‘100% reserve bitcoin bank’ is of equal risk as a ‘100% reserve silver bank’, they both depend upon 3rd party trust.

    Every instance of ‘fraud’, ponzi, or loss in the bitcoin community happens every single day in the dollar, gold, and silver markets, only several orders of magnitude larger!

    The difference between the elite’s digital money and bitcoin is that the elite can simply ‘close your account’ and every transaction can be ‘taxed’, ‘reversed’, and is tracked to known identities. With bitcoin, the government cannot steal your money and with relatively straightforward schemes, they cannot even track it. (By default it is somewhat trackable if you are not careful).

    The problem isn’t ‘digital money’, the problem is ‘centralized control’. I fear that even with gold and silver, the elite can and will maintain ‘centralized control’ simply by declaring gold/silver contraband and confiscating it like they do drugs.
    Sure, you may not get caught, but don’t tell me it wouldn’t affect its marketability with the average Joe. It is much easier to hide and transact in bitcoin than physical silver. If gold/silver money takes on a life of its own, the elite own enough to ‘reboot’ their fractional reserve scam and the people are dumb enough to let them get away with it again.

    Irving14941, I cannot tell if you are in favor of it or not… but either way your argument is either the fallacy of ‘guilt by association’ or ‘appeal to authority’ neither of which is proper for a community that claims to be so ‘aware’ and of a new consciousness.

    Where are the ‘real’ arguments against bitcoin? Arguments that are not based upon straw man attacks?

    • dabear88

      The only thing I’ve got against Bitcoin is that it’s not tangible much like today’s fiat currency. Obviously digital money play’s and will continue to play a role in our daily lives. It simply solves too many problems and creates substansial effeciencies not to. However when I do my banking and digital transacting, I would prefer my money to be backed by something tangible like gold or silver. I simply don’t have enough trust in bitcoin’s algorithim to place my bets with it. To each his own though. It’s your money, your free to use it how you wish. My grandad used to say, “whatever’s easiest”. If bitcoin works for you, then use it. Cheers, G

      • john doe

        I am a software engineer who has throughly studied and even implemented the algorithm behind bitcoin in multiple variations. When you state you don’t trust the ‘algorithm’ it could mean different things:

        1) You don’t trust cryptographic public/private key security… but, if you didn’t trust that algorithm then you cannot trust any banking system.

        2) You don’t trust the ‘proof of work’ hashing algorithm… then you expect that either:
        A) someone will come up with a ‘magic’ algorithm for calculating hashes other than ‘brute force’, and thereby also invalidate many other encryption techniques.
        B) someone will buy up specialized hardware allowing them to ‘out-hash’ everyone on the network and thereby undermine the block chain. Even with this, they would only be able to ‘double spend’ money they had and the community at large would adapt the proof-of-work system. There is already an effort in place to add additional ‘consensus’ mechanisms that prevent a 51% of hashing power attack.

        3) When you say ‘backed by something tangible’, what you really mean is ‘backed by the full faith and credit of some bank’ which is entirely intangible and easy enough for the government to ‘rob’, ‘confiscate’, ‘regulate’, or ‘license to steal’.

        4) Bitcoins are ‘backed’ by something ‘tangible’, and by ‘tangible’ I mean something that cannot be ‘counterfeited’ or ‘generated at the whim of a central authority’. People have to work to create them.

        5) The ONLY risk to bitcoins is if the community at large (bit coin miners) decided to ‘inflate’ the currency by accepting transactions that increase the bitcoin money supply beyond the amount defined by the current algorithm. Due the the decentralized nature of bitcoin, the soon to be released ASIC hashing chips (10x increase in hashing power/reduction in power and price), every member of the community that ‘wants a vote’ can simply purchase a hashing machine. But even this inflation would be ‘public’ and not debt-based. The newly inflated currency would go to miners which would cause a rush to purchase mining hardware until the ‘cost of generation’ equals the amount of new BTC created. In other words, even a community vote (via hashing power) would only temporarily favor miners and would take long enough to ‘implement’ that it wouldn’t favor them for long.

        6) If an entity such as the government decided to spend a billion dollars to take over ‘hashing’, the blocks that they created would still have to be ‘accepted’ by the majority of bitcoin clients or the blockchain would fork creating two ‘currencies’, the government created fork wouldn’t be accepted by merchants and therefore would have ‘no value’.

        7) What remains is the only possible vulnerability of a government backed hashing supercomputer is the ‘double spend’ which must be done one transaction at a time and would not be very profitable and would ultimately only hurt the individual who accepted the double spend.

        So where are you going to put your trust, mathematics reviewed by thousands of people with millions on the line, or the full faith and credit of some 100% reserve silver bank that is vulnerable to political pressure, physical theft, and counterfeit coins?

        • James Tetreault

          Why do you pretend that the only way to have money in silver is through a bank?

          • dan

            I don’t pretend that the only way to have money in silver is through a bank. I state that the the minimal physical size usable for transactions (a dime) is worth far too much today and certainly after silver reaches its true value to be used for most small transactions. Therefore, to support 1 gram denominations (or smaller) will require a bank.

            I also state that to make purchases over the internet will also require a ‘bank’.

  • James Tetreault

    Of the usual list of qualities that money should have,

    1. Acceptability
    2. Durability
    3. Portability
    4. Scarcity
    5. Divisibility
    6. Cognizability
    7. Malleability

    How do you see bitcoins satisfying all of them? Some aspects such as acceptability are clearly nowhere near as good as they are for gold and silver at this point in time.

    8. Uniformity – It means that All version of the same denomination of currency must have the same purchasing power so that very denomination must be in uniform..

    Read more: http://wiki.answers.com/Q/Characteristics_of_good_money#ixzz25ezAFDfl

    • dan

      Acceptability – this is something that evolves over time, clearly gold/silver are not universally acceptable… you cannot even buy a taco at tacobell with a 1oz gold coin because the masses are ignorant.

      Durability – nothing more durable than information that can be backed up, printed out, etc. The greatest weakness of bitcoin is its dependence upon cheap and fast communication. But most markets today are equally vulnerable to this.

      Portability – bitcoin wins here over everything else…

      Scarcity – once again, bitcoin wins. The amount is fixed or shrinking as money is lost.

      Divisibility – bitcoins are divisible down to .0000001

      Cognizability – the computer easily recognizes and validates bitcoins, no fear of counterfeit coins.

      Malleability – bits and information is very malleably and doesn’t ‘wear out’ or ‘flake off’.

      Uniformity – all bitcoins are identical and interchangeable and therefore have equal purchasing power. You cannot say this about any coin standard as wear on the coins causes slight variations in value.

      Any other questions?

      • James Tetreault

        I’m not opposed to the bitcoin concept but I think you’re glossing over a couple of these points, in particular to how things will be perceived should the merde hit the fan.

        If there’s a collapse and the general public finds that almost every paper instrument has been a source of varying degrees of fraud, there will be a degree of revulsion toward a currency that seems even further removed from tangible reliability than federal reserve notes.

        Will the typical small business owner want to have anything to do with bitcoins after his IRA money was stolen, his bank account was seized by the government when they suddenly declared a bank holiday and the cash he had in a box in the back room was rendered nearly worthless. But trust us, John Q. Shopkeeper! You can rely on this one. Bitcoins are not like the others.

        And maybe they aren’t. But I hope you can see that the concept is gonna have an uphill climb on acceptability if/when other things that have some similarity in the minds of the public all go bad.

    • Citizen Doctor

      It’s helpful to recognize that money has two functions which are overlapping but distinct: store-of-value and currency. Some of the qualities you listed apply more to one function than the other. For example, portability is very important for the currency function, whereas scarcity is very important for the store-of-value function.

      It’s fairly obvious that as things stand today, gold and silver are superior as reliable and time-tested stores of value, whereas bitcoin is superior as a currency, although both meet all the qualifications of money to some degree. They are both decentralized forms of money and will therefore play important and complementary roles in the coming new paradigm.

      Bitcoin is a brand new form of money, not even technologically possible until recently, still undergoing beta testing, and therefore should be used with caution until it matures. But it, or some other variant of decentralized digital currency, is here to stay as an alternative to central bank currency.

  • Terr

    Let’s remember that this article is about an “Online Hedge Fund”. Whatever that is. The quote at the end of the article, “He has been paying interest since late 2011, albeit a helluvalot more recently… it looks like he doubled the size of the scam from April until it went boom,” makes it look like a true Ponzi scheme. But this could have been back by cash, instead of bitcoin. Plus, as people panicked…and started withdrawing funds…it all unraveled. I wonder how leveraged was he? Was he trying to be honest? I’m sure our banks are honest–until they can’t be.

    The point I’m making is that if this article is a case for holding physical, that’s great. Don’t invest your phyiscal (bitcoins, silver, cash) with a 3rd party. If it’s a case against BitCoin, I disagree.
    And yes, you can hold Bitcoins in your hand.

    I see just as much risk in having Lakota Free Bank holding my silver for 3 years to get 7.25% interest.

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