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Bitcoin Crime The Almighty Buck

Large Bitcoin Ponzi Scheme Collapses With a Loss of $5.6 Million 327

Posted by Soulskill
from the jig-is-up dept.
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."'"
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Large Bitcoin Ponzi Scheme Collapses With a Loss of $5.6 Million

Comments Filter:
  • No sympathy (Score:5, Insightful)

    by 1u3hr (530656) on Wednesday August 29, 2012 @04:18AM (#41163517)
    But the guy for fraud, sure, but the "investors" were idiots.
  • Re:No sympathy (Score:3, Insightful)

    by Anonymous Coward on Wednesday August 29, 2012 @04:20AM (#41163535)

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

    I wouldn't call them idiots for investing, but they can't complain when they lose all of their unregulated currency to a Ponzi scheme.

  • by Anonymous Coward on Wednesday August 29, 2012 @04:21AM (#41163539)

    Well if it was a fiat currency like the US $, they could have just 'sold' the ponzi assets to the Federal Reserve who would promptly magic some more $$$ from nothing. Really transferring value from every other Bitcoin user to these Ponzi scheme fund managers.

    So isn't the collapse of a Ponzi scheme in Bitcoin validation of the value of the currency? Nobody bailed it out the way Wallstreet was bailed out, because nobody COULD bail it out.

    No TARP is possible is Bitcoin land.

  • by Anonymous Coward on Wednesday August 29, 2012 @04:30AM (#41163587)

    Stock markets work on the same principle. Balooning stock (e.g. Apple), then you sell it to someone else at higher price, and as it changes hands as hot potatoes, at some point critical mass of people realize it's not worth that much and the unlucky guy looses.
    The usual zero sum game. If you are early enough into it, and get rid of the stock before trouble, you earned yourself cash that someone else will not reclaim in the end.
    Ponzi scheme is just the most obvious tip of the iceberg of this phenomenon.

  • by deego (587575) on Wednesday August 29, 2012 @04:36AM (#41163623)

    Blaming bitcoin for this ponzi is like blaming the currency USD for what Madoff did. (Come to think of it, USD, with fed's liberal printing, really /is/ like a ponzi, but that's a separate matter.)

    The fact is that there are a large number of us bitcoin investors who haven't invested a (bit)cent with this scheme.

         

  • by eldavojohn (898314) * <<eldavojohn> <at> <gmail.com>> on Wednesday August 29, 2012 @04:37AM (#41163629) Journal

    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.

    No, your C to Bitcoin analogy is a bit flawed. If C had a unique trait that was unique from all other computing languages that made it insulated and without consequences for virus writers (and this is impossible) than it would be a valid analogy. The problem is that all other currencies have some entity backing them that has a motive to or already does instituted financial regulation -- like stopping ponzi schemes. And the logic for this is quite simple. If you don't protect idiots, then idiots can't use your currency. Since much of the population is idiots, you need to protect them from the really bad stuff that comes along with capitalism -- otherwise your system starts to look really shitty and third world really fast.

    So, there's no way to fix this with BitCoin because that's the great thing about BitCoin: no government regulation or government backing. I suspect you're going to start to hear more and more stories like: lack of security in major BitCoin trading systems (with no repercussions), more ponzi-like activity (with no repercussions) and more child porn/drugs/etc bought with BitCoin (with no repercussions). And then once it becomes evident that there are no repercussions? Just watch the copycats copy.

    So, yeah I find your BitCoin is like C really really flawed. But of course, if anyone thinks that BitCoin is the currency of the future and there are finite BitCoins, it only makes sense to move all of your liquid assets and investments to BitCoin so put your money with your mouth is if you want to defend BitCoin and that will be the most effective way to validate this currency.

  • by Anonymous Coward on Wednesday August 29, 2012 @04:40AM (#41163643)

    Except in cases where we have a temporary abberations like an industry bubble or individual prospecting overvaluation (which usually happens around IPO's), no. Businesses use that capital to bring in greater revenue on what they do, and redistribute profit on those revenues back to investors. Sometimes they choose not to issue dividends, and instead use those increased revenues to continue to build the value of that same business, whereby the value of your stake increases. In no way is that normal operation anything like a Ponzi scheme.

  • Re:No sympathy (Score:5, Insightful)

    by Theophany (2519296) on Wednesday August 29, 2012 @04:48AM (#41163691)
    Maybe this is a bit obvious, but if a guy going by the handle pirateat40 is asking to invest my money, I'm a retard for not being justalittlefuckingbit sceptical.
  • by eugene2k (1213062) on Wednesday August 29, 2012 @04:52AM (#41163715) Homepage

    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.

  • by alphatel (1450715) * on Wednesday August 29, 2012 @05:18AM (#41163867)

    If you don't protect idiots, then idiots can't use your currency. Since much of the population is idiots, you need to protect them from the really bad stuff that comes along with capitalism -- otherwise your system starts to look really shitty and third world really fast.

    So, there's no way to fix this with BitCoin because that's the great thing about BitCoin: no government regulation or government backing. I suspect you're going to start to hear more and more stories like: lack of security in major BitCoin trading systems (with no repercussions), more ponzi-like activity (with no repercussions) and more child porn/drugs/etc bought with BitCoin (with no repercussions).

    So you're now going to argue the SEC protects citizens and catches ponzi crooks before all is lost? Wrong century!
    The useless government isn't going to do squat for real money or anything else. If your BC community is about helping each other and someone blatantly steals your virtual cash, you now know that you can't trust your fellow man without some virtual credibility. In this case the scammer had none, but people went for it anyway.

  • by FireFury03 (653718) <slashdotNO@SPAMnexusuk.org> on Wednesday August 29, 2012 @05:28AM (#41163921) Homepage

    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.

    It isn't a ponzi scheme, but it does resemble one in some ways:

    With a ponzi scheme, the early investors make great returns due to the influx of later investors. The returns gradually diminish as time goes on because the money from new investors has to be spread more thinly, the early investors get to cash out before the whole thing collapses.

    With bitcoin, early investors get a lot of bitcoins (as they are easy to produce at the start). Later investors don't get so many, and as more and more investors enter the scheme, the currency gets spread more thinly and therefore each bitcoin gains value. The early investors still have their big stack of bitcoins, which now have considerably more value than when they started due to the increasing scarcity of bitcoins amoungst the later investors. The scheme may or may not eventually collapse, but either way the early investors are left with huge gains and the ability to cash out before anything bad happens.

    As nobody sane would invest in something that explicitly advertised itself as a ponzi, such schemes always involve secrecy and obfuscation.

    I'm not sure that's necessarilly true. Ponzi schemes *do* make a lot of money for the early investors, so it would be reasonably sane to enter such a scheme if the scheme is very new, then cash-out before it goes tits-up. Without some inside knowledge about the scheme, it would be pretty risky though because you don't know whether you are going to be an early investor or a late investor (who will lose all their money).

    Bitcoin, being a currency, is not an investment

    Currencies are frequently used as investments. Anything that fluctuates in value can be used as an investment (shares, currencies, properties, etc) - with all these things, the trick is to buy when it has a low value and sell when it has a high value. This is probably even more reason to invest in bitcoin, since the increasing scarcity of the coins is likley to gradually drive the value up (assuming the currency doesn't fall into disuse).

  • Re:No sympathy (Score:3, Insightful)

    by gigaherz (2653757) on Wednesday August 29, 2012 @05:30AM (#41163927)
    Anything is a valid currency if people give a value to it. If you spend money to get bitcoin (electricity used to run the gpu), and use bitcoin to buy stuff, then it means bitcoin is a currency. Also he stole bits, not pixels. Digital bits can be coins the same way real coins are metal that's put into the shape of a coin.
  • by Lumpy (12016) on Wednesday August 29, 2012 @05:30AM (#41163931) Homepage

    "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.

  • by ratbag (65209) on Wednesday August 29, 2012 @05:40AM (#41163985)

    One of the hackneyed excuses for spelling or grammar mistakes is to say that language is mutating.

  • by erroneus (253617) on Wednesday August 29, 2012 @05:51AM (#41164043) Homepage

    Yes. There will be no government bailouts of Bitcoin.

  • by Talderas (1212466) on Wednesday August 29, 2012 @06:25AM (#41164233)

    Interest on accounts is not something for nothing. There is an very obvious opportunity costs that comes with depositing your money. You lose control of it and you lose some access to it.

    Look at interest bearing back accounts. There's typically a minimum balance that must be kept before you're assessed fees. CDs close off access entirely. Even in no account minimum interest bearing accounts you will often have to go into the bank itself (time) in order withdrawal all the funds and close the account.

    The only real reason those accounts appear to be something for nothing is because the banks you deposit at are insured by the FDIC so you can't get scammed and the reality is that the only banks an American is likely to deal with that are not FDIC insured are international banks or are scams.

  • Re:No sympathy (Score:5, Insightful)

    by Talderas (1212466) on Wednesday August 29, 2012 @06:27AM (#41164241)

    Or the guy is brilliant, figured that old guys would be more trusted, and used that nick.

  • by Anonymous Coward on Wednesday August 29, 2012 @06:36AM (#41164285)

    First, it isn't a matter of "getting something for nothing". Your cash on hand represents current and possibly future wealth. By parting with it now, there is an opportunity cost involved. In theory, you performed services or provided goods in the past to generate that wealth and you are transferring that value to another individual who has not earned it, with the intent that they can piggy back on your wealth to generate additional wealth for both of you. The premise is that the recipient of the investment funds presumably has valuable knowledge or connections or some other time valuable commodity and simply lacks the wealth to capitalize on it. Ostensibly you are forming a partnership. So no, it isn't about "getting something for nothing".

    It is a matter of transparency and accountability.

    If you are an established financial institution, adhering to the regulations of the government with regard to fiduciary responsibility, with a clearly stated foundation on just how it is you plan to provide me my interest and if I have an obvious means of redress should you fail to meet your obligations, then I think it is fair to consider investing with you.

    If you are an individual, relatively new on the scene, with only an online handle to identify you, wishing to operate with a form of currency which is purposefully advertised as being anonymous (whether it is or not is another matter), and have not actually provided information on just how you plan to generate the revenue to pay the interest, then yes, why on earth would I give you my money?

  • by m.ducharme (1082683) on Wednesday August 29, 2012 @06:37AM (#41164295)

    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).

    That's not a ponzi scheme, that's a pyramid scheme.

  • by bickerdyke (670000) on Wednesday August 29, 2012 @06:41AM (#41164321)

    Interest on accounts is not something for nothing. There is an very obvious opportunity costs that comes with depositing your money. You lose control of it and you lose some access to it.

    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.

  • by Talderas (1212466) on Wednesday August 29, 2012 @06:43AM (#41164333)

    Regulation isn't there to protect anyone. It's only purpose is to serve as a punitive measure once your found out as having done wrong in accordance with the regulation.

    It doesn't matter how much regulation gets put in place, idiots will still be idiots and end up parted from their money. Even if the crook is caught, the idiots will be lucky to get back a fraction of what they lost.

  • by IamTheRealMike (537420) <mike@plan99.net> on Wednesday August 29, 2012 @06:55AM (#41164433) Homepage

    This argument comes up repeatedly, but it's ridiculous. It's very often the case that new technologies reward early adopters who do nothing beyond "leech", but practical experience shows that the big winners are always people who create real value.

    Maybe an example makes things clearer. If you were an early adopter of the internet then you would have had the chance to obtain huge IP blocks and tons of domain names for virtually nothing, these are scarce resources that would later become very valuable. But if you asked the man on the street to name some internet millionaires, chances are they would name people like Mark Zuckerberg, Larry Page, Sergey Brin, maybe Marc Andreseen and so on. People who built real businesses and real value. In practice although domain speculators did and do exist, the world is not awash in a lazy elite of people who just camped on scarce resources for decades. Nor does the existence of a small number of these people make the internet "behave similar to a ponzi scheme".

    Whilst Bitcoin certainly does have people who did nothing beyond buy up coins early and sell them later, there are also tons of early adopters (like me) who are creating real value by writing software, running services, being merchants, mining and so on. These people risk something very real - usually their time and capital - to build the system, and they may or may not do very well financially out of it. Just like any new technology. Your grist with miners is particularly bizarre because the people who mined on Bitcoin when the coins were worth little/nothing were actually sacrificing real capital (for electricity/cpus) to provide security to a system that was extremely small and unlikely to go anywhere.

    By the way, the people who mined coins when it was very easy didn't know Bitcoin would take off. A lot of the early coins have been lost because for around 1.5 years Bitcoin was merely an interesting piece of open source software. The coins had no value and there were no exchanges, but mining had real cost in terms of electricity, pegged CPUs and so on. So people would mine or get some coins, get bored and delete the software/not back up their wallets, etc.

  • by DrXym (126579) on Wednesday August 29, 2012 @06:57AM (#41164451)
    And bitcoin investors by virtue of buying bitcoins have saved the scammers a lot of effort by identifying themselves as easy marks. Much like how some scammers operate on church congregations, MLM members, timeshare owners, people who've bought cures "they" don't know want you to know etc. By virtue of the fact that rational people would run a mile from these things, the scammers know that those who remain are far richer pickings.
  • by bloodhawk (813939) on Wednesday August 29, 2012 @07:31AM (#41164739)
    The scheme was promising 7% return per week. Even among the gullible and greedy it takes a special breed of idiot to believe such guarentees can be anything but a scam.
  • by CrimsonAvenger (580665) on Wednesday August 29, 2012 @07:46AM (#41164891)

    The scheme was promising 7% return per week. Even among the gullible and greedy it takes a special breed of idiot to believe such guarentees can be anything but a scam.

    Hmm, that's 3270-odd percent per year.

    Yah, it takes a special breed of idiot to buy into that.

  • by h4rr4r (612664) on Wednesday August 29, 2012 @08:14AM (#41165241)

    Zuckerberg created value? Are you fucking kidding?

    He his a fine example of scamming your way to the top.

    Mining bitcoins does not create value anymore than mining MikeCoins. They fail as a store of value as well. I need dollars to pay taxes, I can also use them for all other economic activity. I cannot pay taxes with bitcoins, not can I use them in my day to day life.

    The fact that bitcoins can be destroyed in the way you describe is not a good thing. It means there are less and less of them each year. This means if they catch on they will encourage hoarding and be a huge hindrance on any economy tied to them.

  • by Bill, Shooter of Bul (629286) on Wednesday August 29, 2012 @08:42AM (#41165663) Journal

    Yes, this is banking without any regulation. The FDIC does some background checking on banks and steps in when there is trouble. In the absence of such a trusted third party performing due diligence, you the individual must perform the same level of investigation to determine if its a trustworthy source for depositing money. The reason why they are stupid for investing or depositing in this scheme, is that they didn't do that research or even recognize the need for it.

  • by makomk (752139) on Wednesday August 29, 2012 @08:43AM (#41165687) Journal

    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.

  • by Great Big Bird (1751616) on Wednesday August 29, 2012 @09:13AM (#41166199)
    There is no such thing as intrinsic value. Gold and silver only have value because we give it that. The same thing with a fiat currency, both are based on a faith in its value.

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