It was the year 2011, and Bitcoin was under the radar almost completely. In the following year it would begin to surface occasionally, with an article in New Yorker here, and in Fast Company there, but for the most part it was an underground movement, an outsider concept.
Early adopters the world over set up mining rigs in their basement, which they monitored remotely using their Galaxy SII or iPhone 3.
As the gigahashes rolled in, they kept their fingers crossed hoping for a future where the digital currency would be worth more than a few pennies.
But even though knowledge of Bitcoin was limited to a small group of people, that didn’t stop it from growing. And as it grew, more and more people begin to see the opportunities Bitcoin offers for building wealth. And, of course, it attracts all types.
Bitcoin Savings & Trust
Enter “pirateat40”, a forum member at Bitcoin Talk, and founder of The First Pirate Savings & Trust, which he would rename Bitcoin Savings & Trust.
Pirateat40 created Bitcoin Savings & Trust around the idea that he had been buying and selling bitcoins to a group of people whose identity he would not reveal. As he did so, however, he began to run out of his own reserves and leased coins from his friends. When that well dried up, he brought the idea to the entire Bitcoin Talk board, as a way to find a consistent flow of coins.
He had two models for this. One was on-demand storage, where he would send out a request for the total funds needed, and users would provide coins as available, at a flat interest rate of 3.5%.
But the other one, which caught most of the attention, was the storage model. At any time, one could send bitcoins to pirateat40’s wallet, and earn 1% interest daily in exchange for the privilege of using their coins “until either you withdraw the funds or my local dealings dry up and I can no longer be profitable.”
He requested a minimum of 50 BTC, which at the time was not so astronomical a request as it may seem today.
Now, a guaranteed weekly 7% return is naturally unsustainable. And combined with the vaguery of Bitcoin Savings & Trust’s actual investments, we have two of the telltale signs of a classic ponzi scheme.
In fact, it seemed like a specific type of Ponzi scheme, an HYIP scam. This is where early investors in a program are paid back with the money from the next round of investors. Then that second round is paid back with the third, and so on until the whole thing collapses under its own weight.
When pirateat40 announced the formation of Bitcoin Savings & Trust on the BitcoinTalk forum, the very first reply was a user pointing out how much it sounded like an HYIP scam. But at that point pirateat40 was reasonably well known and respected member of the community, so other investors ended up investing in Bitcoin Savings & Trust.
For the first week, users were happy with the results. They received their interest, and some users were able to withdraw their principal as well. In fact, for the first few months Bitcoin Savings & Trust was profitable for its investors.
Eventually though, more questions were raised about the sustainability of such a plan. One user raised the question of what would happen if the ten largest investors in Bitcoin Savings & Trust withdrew their funds all at once, and whether pirateat40 would have the reserves to handle this. At this point it had been about six months in, though, and early investors continued to sing pirateat40’s praises.
Pirateat40 would constantly make jokes about “buying an island to escape to” or something similar during times of controversy, but no one ever took it seriously.
For those of you paying attention, you may notice that above few paragraphs describes Bitconnect almost perfectly. There’s a good reason why a large portion of the community opposed what they were doing.
As time went on, pirateat40 remained involved in the Bitcoin Savings & Trust thread on the Bitcoin Talk board, which helped people maintain their faith in him. Eventually, however, the thread was locked and operations were moved to an IRC channel. Shortly after that, pirateat40 announced that he would be closing down Bitcoin Savings & Trust. He promised to pay back all of his investors within a week, and actually did pay back a few of his long time investors and friends. He then disappeared.
The Aftermath
The disappearance of Bitcoin Savings & Trust forced the price of Bitcoin to fall from a then-historic high of $15 back down to $12. It would, of course, recover, but at the time this was a heavy blow to the Bitcoin community.
Some estimates claim pirateat40 raised over 700,000 BTC through Bitcoin Savings & Trust. And because it was done through Bitcoin on an internet forum, pirateat40 was able to remain anonymous.
It was only later that his identity was discovered. Pirateat40 was a man from Dallas, Texas named Trendon Shavers. The US Securities and Exchange Commission caught up with him, arresting him in Collin County, Texas on August 11th, 2013 and charging him with fraud.
Court allegations claim Trendon Shavers was not in the business of buying and selling Bitcoin, and that Bitcoin Savings & Trust did not generate interest for its users through this method. He simply used the BTC from new investors to pay the interest for previous investors.
Shavers pled guilty in September 2015 to one count of securities fraud, and in July 2016 was sentenced to 18 months in prison. In addition, the court ordered him to repay $1.23 million dollars to his initial investors.
The theft of over 700,000 bitcoins remains one of the largest Bitcoin related scams in history. It was also a big moment for the Bitcoin community, as it lent them legitimacy, believe it or not. If the United States government would prosecute scam artists who dealt in Bitcoin like they would someone who dealt in fiat currency, it meant the government and the courts recognized Bitcoin, at least in the sense that they recognized it was an asset which could be stolen.
The Bitcoin community has learned some harsh lessons over the years, and Bitcoin Savings & Trust was a big one. We might feel a sense of camaraderie in the Bitcoin community, since we’re all working toward building a new type of economy, but it’s important not to be naive. There are scammers in all circles, and Bitcoin is no different.
Be careful out there.