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Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt

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Remember pirateat40, the e-currency banker we speculated could be the Bernie Madoff of Bitcoin? Well, it looks like he owes a lot of people money. On August 17, pirateat40 announced the closure of Bitcoin Savings & Trust, a virtual hedge fund that promised to pay high rewards to investors who parked their Bitcoins there. Ten days later, investors are still waiting to get paid and pirateat40 is on the defensive. "When I know, you will," says his away message in the fund's official chat room, an effort to quiet the loudening chorus of, "WHERE ARE MY BITCOINS?"

Pirateat40 consistently maintained that he made his money legitimately through secret investment strategies. The announcement that BS&T was shutting down was similarly vague and obtuse:

The decision was based on the general size and overall time required to manage the transactions. 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. 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.

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."

BS&T claimed to be sitting on 500,000 Bitcoins when it shut down, worth more than $5.6 million USD today

Some investors are still keeping the faith, imagining various scenarios under which they might see their Bitcoins again. Others have started hunting for pirateat40, who is believed to be based in Texas. Others are sure that the jig is up. "It's game over, just a question of who wants to believe it yet," Bryan Micon, a poker player and early pirateat40 skeptic, said in an email. "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."

Pirateat40 and BS&T had been promising interest payments of up to seven percent a week, a rate that would nearly double one's total investment in just 10 weeks. The promises of such hefty profits attracted scores of investors, but the claims struck some as too good to be true. It was speculated that the fund, one of several "high yield investment programs" to pop up in recent months, was a pyramid scheme that used new deposits to pay off its previous investors. One detractor made several bets that BS&T would implode, including a 5,000 BTC wager with pirateat40 himself.

If pirateat40 fails to pay his debts, it certainly won't be the first time an elaborate scheme cost Bitcoin users real money. The community that has sprung up around the decentralized currency still lacks an effective way to deal with crime. However, there is a lawsuit pending in California that aims to take some Bitcoin bankers to task for lost deposits.

The Verge
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