David Canellis

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Bitcoin’s first Ponzi scheme was nothing special — but it was early.



After the 1906 inception of the international reply coupon, it took 14 years for Charles Ponzi to come along with his <a href="https://www.smithsonianmag.com/history/in-ponzi-we-trust-64016168/">legendary</a> scheme, which he peddled across Boston society to the tune of $20 million at the time ($319 million in today’s money).



Meanwhile, it only took Trendon Shavers, aka Pirateat40, less than three years to pull off something similar on the Bitcoin blockchain: Bitcoin Savings &amp; Trust.



<h2 class="wp-block-heading">On This Day – Bitcoin Savings &amp; Trust&nbsp;</h2>



Shavers originally launched the scheme as First Pirate Savings &amp; Trust in November 2011, having cultivated an online persona of a savvy over-the-counter bitcoin trader in IRC channels and on Bitcointalk.



Bitcoin had opened the year at $0.30, hit $30 in June, and had since settled at around $3. Shavers’ supposed OTC desk was now running dry, with requests for more coins only “getting larger and more frequent.”&nbsp;



“Over the last few months I have been selling BTC to a group of local people,” Shavers wrote in his launch <a href="https://pastebin.com/yH0jr6KY">post</a>. “Now this is a ‘don&#8217;t ask don&#8217;t tell&#8217; group of people, so I can&#8217;t tell you exactly where and to whom the coins ultimately end up with, but so far it&#8217;s been pretty painless.”



To help source liquidity, he devised two ways to inspire early adopters to send him their bitcoin, starting at a minimum of 50 BTC ($150 then, $4 million now).



<ul class="wp-block-list">
<li>The “on-demand” tier would pay a 3.5% fee for filling buy orders over what the desk has available.</li>



<li>The “storage” tier would pay 1% per day for bitcoin sent to First Pirate Savings &amp; Trust, with a promise that “you can withdraw your balance at any time.”</li>
</ul>



As was the case with the original Ponzi scheme, initial inflows were rather small, only $60,000 in total over the first two months.&nbsp;



But after rebranding it to “Bitcoin Savings &amp; Trust” on this day in 2012 (with a new website) Shavers’ wallets saw that much on an average day, despite repeated warnings of the community, including <a href="https://bitcoinmagazine.com/business/ponzi-schemes-the-danger-of-high-interest-savings-funds-1338461999">from</a> Vitalik Buterin.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcVSRh9xXbGUjnpZ8nUZKHr8BqN4bpwt-Pg2qCs4Lxmu6UsQVdHYSyYDygREXaEff6H2bBuJlPQw_wZd72pVBvWkvYT2QpZcpGMn00SGIy2jS1WEb0D6L8sWakXDRtnMLYPpBsN?key=xm2WtSBqbG4DoznrxKgR4WvZ" alt=""/><figcaption class="wp-element-caption">Bitcoin’s push to $15 was interrupted by Bitcoin Savings &amp; Trust’s sudden closure, but BTC quickly rebounded.</figcaption></figure>



Just like the real Charles Ponzi almost a century earlier, Shavers never really did any of what he said. To go back in time a bit: Ponzi had promised up to 100% returns to investors who’d backed his wacky plan to arbitrage postage stamps between Italy, where they were cheap in the wake of World War I, and the US, where they were still expensive.



Ponzi couldn’t actually redeem his stamps for cash, or ship enough of them from Europe in any case. Still, he easily paid out interest with the waves of fresh capital, splitting the difference with a mansion, luxury car and a honeymoon vacation. Ponzi was sentenced to five years in prison.



Similarly, Shavers was simply selling coins to cover rent, car payments, shopping and casino gambling. Both plans were over and done in under 12 months.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXdgGVAZESOhrEeoQfAYeJIfmlI6CeFPdP09OBF4jHYJiBuHdeUSpfU1p3JVVvmEUWjVGEQ5CEWTlRCwyMnpsJRk96bvDPWwt0oa15wQW7p89qyeGzxOvLhBKmA57lbhKu5e7kDmrA?key=xm2WtSBqbG4DoznrxKgR4WvZ" alt=""/></figure>



Shavers’ username is a reference to a Jimmy Buffett song, “A Pirate Looks at 40,” which laments about a man born too late in history to get away with adventurous crimes.



The Feds calculated that Shavers, drawing from about 100 investors, had siphoned 193,000 BTC for himself, worth up to $1.5 million back then and $16 billion today (coincidentally similar to the BTC supposedly held by the US government). He was <a href="https://www.vice.com/en/article/lawyer-reveals-details-about-the-man-behind-bitcoins-45-million-ponzi-scheme/">fined</a> $40 million and sentenced to 18 months in prison.



Look onchain and you can still spot the robbing of Bob to pay Alice: On every other day, total flows for Shavers’ wallets would be divided fairly evenly between inflows and outflows. Coins in from new investors, coins out to older ones.



And you can still see almost 1.18 million BTC flowing through wallets linked to Bitcoin Savings &amp; Trust in its short history — the equivalent of around 10% of the entire circulating supply at the time.



At risk of searching for a silver lining in the fraud, there’s this: Whereas actual physical records of Charles Ponzi’s scheme are presumably long gone, we’ll at least forever have a perfect account of Bitcoin’s first-ever imitation.



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Bitcoin’s first Ponzi scheme would be worth $16B today

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When it comes to whether bitcoin is (or was ever) a bubble, the late John McAfee <a href="https://x.com/officialmcafee/status/938938539282190337">said</a> it best. 



“Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain, or you did not [care] enough to try.



“Bubbles are mathematically impossible in this new paradigm. So are corrections and all else.”



That was in early December 2017, when bitcoin traded at under $17,000. It peaked one week later, stopping just shy of $20,000 to cap off a nearly three-year bull market.



Four months passed, and bitcoin slipped by two-thirds to less than $7,000, marking the first act of a bear market that lasted only one year.&nbsp;



If only Bloomberg and Bank of America chief investment strategist Michael Hartnett had listened to McAfee.



On this date in 2018, <a href="https://www.bloomberg.com/news/articles/2018-04-09/bitcoin-seen-popping-like-the-greatest-bubbles-by-bofa">Bloomburg posted an article</a> called “Bitcoin, the Biggest Bubble in History, Is Popping.&#8221; In analysis cited the article, Hartnett’s team plotted bitcoin’s most recent bull market against well-known asset bubbles — the Wall Street crash that ended the Roaring Twenties, the South Sea Company and Mississippi bubbles in the 18th century, and the often-cited Dutch tulip craze a century earlier.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXeYDx_tmaJE1uCWA6HV8er6ulG9wIriJCxr5AQDI1M_O10Sqp0gUHT-akgDAOxq6vwGBG6WO4bMlYODsj4K8GPGXh7RuwvEICquy1UUf8OMbfJzw-7pJee1HxdODymUavsOId2ODw?key=EWy5H33Q5JDD9iYKGCNA-ra2" alt=""/></figure>



But there are bubbles, and then there’s price discovery.



Dutch tulips had indeed exploded from a single guilder in early 1635 to 60 guilders two years later — a 5,900% rally — before collapsing by more than 99% in a matter of weeks.&nbsp;



Bitcoin, meanwhile, had managed 8,900% in the three years leading up to its December 2017 all-time high, starting at $224.



That’s more returns than the South Sea Company, Mississippi Company, and Roaring Twenties bubbles combined.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXfXZkAKH0mY9GAxKLVU0Xj1P9LW97hNeR_CqkwN5BD4rlwQbIdMt4q6XvKBTiGQ3W4CxQHe3nLC9e82bFS5-UmmI0sQsVEVWfKxeeE1xaksRzNOigyV5ZoOSV1vpFEQJWi4fkxy?key=EWy5H33Q5JDD9iYKGCNA-ra2" alt=""/><figcaption class="wp-element-caption">The original BofA chart implied bitcoin was the “greatest asset price bubble” in history</figcaption></figure>



But where the South Sea and Mississippi Companies folded entirely after their individual markets tanked, and the Dow languished for nearly a decade through the Great Depression, bitcoin itself never suffered such a drastic fate.



Despite a string of bankruptcies for over-leveraged bitcoin miners — which helped to push bitcoin down by another 50% in the nine months following Hartnett’s note — bitcoin reversed course significantly over the next two quarters in what’s <a href="https://thedefiant.io/news/research-and-opinion/charting-history-s-rhyme-understanding-the-cyclicality-of-crypto-markets">considered</a> a short but legitimate bull market cycle.



Bitcoin returned to its December 2017 all-time high three years later almost to the day, whereas it took 15 years for the Nasdaq to do the same following the bursting of the dot-com bubble, and almost a decade longer for Japan’s Nikkei 225 after its own market mania in the late ‘80s.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXe4Ile4r5R8p2iFXwBrK28GoWDoYEgtpU7oWwWhmd106Isv-pnSfq6cuj_DbioayNjPjhMUJ8vfvIe3rY_-e4pH_yHjW0d5ZjXZ7SEEeM2V-lYIvfgU0b4lIOp364ZKTwluSCPHUQ?key=EWy5H33Q5JDD9iYKGCNA-ra2" alt=""/><figcaption class="wp-element-caption">Take that, tulips!</figcaption></figure>



Bitcoin has been declared <a href="https://bitcoindeaths.com/">dead</a> 67 more times since Bloomberg’s article, and it’s up more than 1,000%.



Which, of course, makes the notion of a “bitcoin bubble” mathematically impossible, just like McAfee said. RIP.



— David Canellis



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<h2 class="wp-block-heading">Did You Know?</h2>



If Sir Isaac Newton — the famed mathematician who defined our modern laws of physics — was alive today, there’s a good chance you’d see him in the trenches.



Newton <a href="https://royalsocietypublishing.org/doi/10.1098/rsnr.2018.0018#:~:text=It%20is%20easy%20to%20imagine,of%20%C2%A320%20000%20or%20more">built</a> up a strong diversified portfolio of government bonds and stocks in the early 18th century, and he was even appointed as Master of the Royal Mint for more than 30 years due to his scientific achievements.



Despite this, Newton was still caught in a pump and dump for a stock he’d been holding for years — the South Sea Company.



The South Sea Company was a joint-stock government enterprise intended to stymie spiraling national debt by exploiting what were supposed to be massively lucrative trade routes with Spanish territories across South America.



Despite very low revenue at the time, hype in Britain quickly reached fever pitch and the stock went nearly 10x in the first six months of 1720.



But with no actual profits, it resembled a Ponzi scheme more than a bona fide company, while insiders manipulated the market for massive personal gain.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcUePvht7vsqUCTIruoe1mle9rhUwOo6nbTa2L8JsawjCkumjUMVNQUzHVcoZD8g7YvFhKepIXnXJXz3RaPpdQeYIyYMXWPJ2hRkO35hmJyJwyMJ39bhEM4k-H97VHLQVX0Db8j?key=EWy5H33Q5JDD9iYKGCNA-ra2" alt=""/></figure>



<a href="https://newtonandthemint.history.ox.ac.uk/global-financial-world/newton-and-the-south-sea-bubble#:~:text=It%20is%20likely%20that%20Newton,out%20arrangements%20for%20the%20Company">Legend</a> has it that Newton had, unfortunately, cashed out too early, FOMO&#8217;d back in at the top, and bought massively on the way down, losing today’s equivalent of $25 million in the crash.



“I can calculate the motion of heavenly bodies, but not the madness of people,” he supposedly said, and forbade anyone in earshot from mentioning “South Sea” ever again.



If only they’d heard of HODLing in the 1700s.



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BofA’s blunder: How bitcoin turned a ‘crash’ into a 1,000% surge

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Heartbleed was a <a href="https://blog.cloudflare.com/heartbleed-revisited/">tiny but critical flaw</a> in the “heartbeat” extension of OpenSSL, the widely-used open source cryptography library. OpenSSL powers both Secure Sockets Layer (SSL) and Transport Layer Security (TLS) encryptions meant to protect sensitive data when using websites and other online services.



OpenSSL’s heartbeat is a type of ping — a tiny message passed back and forth between the user’s machine and the server they’re connected to — which proves the connection is alive.&nbsp;



A missing check for the length of that message meant that whatever was sitting in the target’s RAM could be siphoned, in plaintext, without a trace: usernames, passwords, cookies, or even bitcoin private keys.



As cryptographer Matt Blaze <a href="https://x.com/mattblaze/status/453422425968218112">put</a> it, Heartbleed “leaks data beyond what it’s protecting. So [it’s] worse than no [cryptography] at all.”



Heartbleed actually went undiscovered for two years. Initial estimates <a href="https://arstechnica.com/information-technology/2014/04/critical-crypto-bug-in-openssl-opens-two-thirds-of-the-web-to-eavesdropping/">suggested</a> that two-thirds of the internet was relying on OpenSSL at the time (2014), but not all of it was running vulnerable versions. 



More specific <a href="https://www.netcraft.com/blog/half-a-million-widely-trusted-websites-vulnerable-to-heartbleed-bug/">calculations</a> pointed to half a million affected websites, equivalent to around 17% of all SSL web servers globally, including Instagram, Tumblr, Google, DropBox and GitHub, as well as routers, VPNs, some Android <a href="https://www.cnet.com/news/privacy/how-to-tell-if-your-android-device-is-vulnerable-to-heartbleed/">devices</a>, and perhaps most importantly for Bitcoiners, crypto platforms.



Anyone who ran software containing the Heartbleed bug, or otherwise interacted with sites or services which did, was technically at risk of attack, even if the exploit required them to be active at the time.



So, as admins around the world rushed to patch their systems (95 out of the top 100 sites on Alexa were <a href="https://jhalderm.com/pub/papers/heartbleed-imc14.pdf">patched</a> within 24 hours), the Bitcoin ecosystem ran its own crisis playbook.&nbsp;



Bitstamp <a href="https://siliconangle.com/2014/04/09/bitcoin-weekly-2014-april-9-the-heartbleed-bug-edition/">briefly</a> took itself offline, and Bitfinex suspended withdrawals as Coinbase and BitPay confirmed their stacks were free of the flaw. Cybersecurity researchers and industry figures urged users to change their credentials as soon as possible, while others independently compiled lists of sites and services still running the vulnerable versions of OpenSSL.



Bitcoin Core developers, meanwhile, pushed through an emergency patch within a day.&nbsp;



The consensus software itself did not rely on OpenSSL (network messages are unencrypted by default), but other parts of the client did — particularly relevant for those directly interacting with nodes and the now-depreciated BIP-70 payment requests, which enabled payments by clicking a “bitcoin:” link.&nbsp;



Amazingly, the most <a href="https://jhalderm.com/pub/papers/heartbleed-imc14.pdf">severe</a> known case of a bitcoin-related Heartbleed exploit was the matter of 28 BTC ($6,500 then, $2.5 million now) stolen from 12 customers of early lending platform BTCJam. The platform quickly <a href="https://web.archive.org/web/20140621110906/http://blog.btcjam.com/post/82158642922/official-btcjam-update">refunded</a> the lost coins.



That Heartbleed wasn’t worse for Bitcoin is down to the fast and effective response from the ecosystem as it was in 2014. Bitcoin Core developers would go on to shed the software’s dependencies on OpenSSL over the following years, and by June 2020 it was completely free of it.



We all know bitcoin is backed by Bitcoin. It’s valuable partly due to the energy that miners spend in pursuit of the protocol’s longevity, amplified by external demand for the coins they earn in return.



More critically, however, is that bitcoin is backed by those who’ve contributed to its evolution and safety — and they’ve become exceedingly efficient at it over the past decade and a half, even if they’re only human.



— David Canellis



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<h2 class="wp-block-heading">Rizzo’s take, the Bitcoin Historian</h2>



In an era where Bitcoin upgrades appear <a href="https://www.youtube.com/watch?v=GdgQ3IflBJ0">ever-gridlocked</a>, the Heartbleed bug may seem like a dusty relic of Bitcoin’s reckless past, a callback to a time when the project’s developers moved at the speed of more traditional software projects. (Think: “Move fast and break things.”) In other ways, the Heartbleed bug is a timeless reminder of the risks Bitcoin developers must consider on behalf of users, and how, despite our proclivity to dismiss their recognition as a special class of project contributor, they retain distinctive responsibilities and privileges.&nbsp;



I recall Jameson Lopp’s <a href="https://blog.lopp.net/against-quantum-recovery-of-bitcoin/">excellent new essay</a>, “Against Allowing Quantum Recovery of Bitcoin,” on how Bitcoin might respond to a potential quantum computing threat.



In many ways, the arrival of quantum computers and their deployment on the Bitcoin network would be reminiscent of the Heartbleed bug. Developers would have to act, and those actions will have an effect not just on users, but on the wider network.



Lopp’s work raises more questions than answers, but it’s a solid reminder that while some populist Bitcoin evangelists like Michael Saylor are touting the technology as ready for centuries in Washington DC, there remain scenarios where Bitcoin might need human maintenance, and that may invite new opportunities for human error.



— Rizzo



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