Matt Levine writes, capturing the fundamental spirit of investment and financier:  Trendon Shavers, alias “pirateat40,”¹ ran a bitcoin fund called “Bitcoin Savings and Trust.” BCS&T was apparently a Ponzi scheme. We knew that; the Securities and Exchange Commission brought a civil case against him last year, which resulted in a $40 million judgment. But other people knew it before the SEC did. Individual-2, for instance, had a pretty good idea:

In or about early July 2012, SHAVERS and another participant on the Bitcoin Forum (“Individual-2”) made a bet as to whether BCS&T was a Ponzi scheme. Specifically, Individual-2 alleged that SHAVERS was operating BCS&T as a Ponzi scheme. SHAVERS denied that allegation and placed a bet with Individual-2 that BCS&T was not a Ponzi scheme.

That actually happened! They found another person (Individual-1) to serve as escrow agent, they each escrowed 5,000 bitcoins with him, they specified the terms of the bet (if Shavers failed to meet a withdrawal request within 14 days, he would be deemed to be running a Ponzi), and the bet paid off less than two months later. This is how the bitcoin legal system operated:

On or about August 30, 2012, Individual-1 declared Individual-2 the winner of the bet, and wrote:

I hereby declare the bet decided, in favor of [Individual-2] . A withdrawal request made on August 15[,] 2012, is still outstanding as of today, Aug[ust] 30[,] 2012, which triggers default as specified in the contract, via “late by at least 14 calendar days, in disbursing either any regularly-scheduled interest payment, or any withdrawal request, by a valid account holder of [BCS&T]” clause.

In private communication, pirateat40 [i.e., SHAVERS] has agreed with this assessment and conceded the bet.

The appeal of bitcoin is that it doesn’t require trust in people or institutions. You don’t have to believe that people are honest, or that governments will keep them honest. You can just exchange bitcoins with them and trust in the cryptography.

That works great for giving people bitcoins in exchange for drugs or whatever. It works less great for investment management: If you give money to someone to invest for you, and want to get it back, you have to either trust her to give it back or have some enforcement mechanism to make her give it back. In that bet, you can see the bitcoin forum groping toward a bitcoiny solution to that problem, with the carefully specified bet and the escrow agent. It’s not quite pure cryptography,² but it is a very bitcoiny and libertarian and charming gesture at private regulation.

It did not especially work, though, insofar as Shavers took the bet and nonetheless continued to operate what sure looks like a Ponzi.

The actual pitch was completely impenetrable, just some mumbo-jumbo about bitcoin arbitrage and lending.⁵ And, similarly, when Shavers shut down his scheme in August 2012, he explained it impenetrably:

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.

c. BCS&T was allegedly primarily in the business of lending Bitcoin to “various investors or lenders” for a fixed period of time. A small percentage (about 10%) was used by SHAVERS to “buy[] and sell[] [B] itcoin [] locally.”

…

g. In or about July 2012, SHAVERS lent about 202,000 Bitcoin to a borrower he identified as “The Big One” and those 202,000 Bitcoin were never returned. SHAVERS has no record or proof that he (SHAVERS) made this loan to “The Big One,” nor does SHAVERS know who “The Big One” is.

h. In or about August 2012, SHAVERS shut down BCS&T, redeemed recent investors, and kept some investor Bitcoin in order “to be able to trade so [he] could make [Bit]coin[] to pay them back.”

700,000 bitcoins were worth around $6.4 million; at the time Shavers shut down BCS&T, they were worth around $9.5 million.     When the SEC got its judgment, they were worth $280 million, though the court went easy on him and only required him to pay $40 million.¹⁰ Now they’re worth around $240 million.