Lessons Learned From the BDT Fiasco

In today’s Bitcoin-related headlines, the fellow in the picture to the left is now wanted for fraud.

The forum thread detailing the rise and fall of Bitdaytrade (BDT) and Alberto Armandi’s alleged crimes is long and involved, filled with drama and broken English. It’s now come to the point where GLBSE site operator Nefario has “doxxed” (made public the identity of) Mr. Armandi in hopes of obtaining information that could lead to his arrest and prosecution. The lawyers are officially involved now and why not? People did lose a lot of money. Today’s article intends to be a brief overview of the BDT fiasco and the lessons we should learn from it.

Those of us who have been around the block(chain) a time or two probably remember Bitcoinica. Bitcoinica, for the uninitiated, was a site that enabled leveraged speculation on the exchange rate between USD and BTC. There are sound arguments for and against leveraged speculation, but for the sake of this article, we’ll just say it’s a service that a lot of people wanted and Bitcoinica fulfilled that desire – until they got hacked.

How does this apply to the story of Alberto Armandi? Well the site he was supposedly attempting to create, bitdaytrade, was intended to be a sort of Bictoinica 2.0 – same successful business model, stronger security. Some behind-the-scenes handshaking took place and PR for the startup landed in the capable hands of Meni Rosenfeld. Now I feel the need to say this before telling the rest of the story: Meni is a victim too. Meni isn’t an accomplice here, to the best of our knowledge, and his business dealings with Alberto were pretty limited. Sadly, when Meni got taken in he did a very good job with that PR and ended up taking a lot of others down with him.

In the beginning, BDT looked solid. It had a good site design and was obviously supplying something the community was clamoring for. Alberto seemed to be the real deal and he was being promoted by Meni Rosenfeld, a very well known, respected, trusted and above all smart member of the community. On July 15th, 2012 Meni posted the IPO on the Bitcoin forums and issued 10,000 bonds at a face value of 1 BTC each, worth about $120,000 at current rates. The bonds promised a 3% weekly interest until the issuer was making enough profits to buy them back at 1.2 BTC each. If 3% weekly (156% annual) interest plus a 120% buyback sounds too good to be true, it’s because it is.

But Meni wasn’t born yesterday – he had these concerns too and like any good con man (“con” does stand for “confidence” after all) Alberto managed to soothe his concerns with some terrible spreadsheets. By his own admission, at the time Meni made the IPO announcement he had enough evidence that he should have backed out, but was blinded by his desire for the project to succeed. His confidence inspired confidence in others and before long not only were all 10,000 bonds sold but more people were clamoring to get their hands on bonds. A few dissenting voices were raised but the voices of the exuberantly optimistic drowned them out.

We all know how this ends, don’t we?

At first, it really did look like Bitcoinica 2.0, complete with the part where they got hacked and went under. Then evidence started to show up that the hacks might not have been genuine, that the site may not have been all it was claiming, that Alberto wasn’t who he said he was. It was eventually revealed that Alberto was also the man behind the Bitscalper scam and that, in fact, portions of the Bitscalper code had been re-used in creating the BDT web site. Sad ending, everyone lost their money, Alberto disappears into the night – the past is gone and all that’s left is to extract the lessons history has for us.

I think the seven lessons learned in Meni’s own post-mortem of the event will serve as a solid foundation:

Everyone is guilty until proven innocent when they want a lot of money from you – “innocent until proven guilty” is great for law, not for business and you shouldn’t feel bad for giving an honest person a hard time if it also protects you from the cons.
When there’s a lot of evidence that something is awry, it probably is. A mountain of circumstantial evidence may not represent proof positive of a scam, but it should be enough to warn you away from the potential for one.
Meni said “I’m not as good in judging people as I thought” for this one, but I’m going to generalize it – everyone is a poor judge of character sometimes. Even if you’re right 99.9% of the time, you should still be cautiously guarding against the 0.1% of the time you’ll be wrong.
Never make investment decisions when you’re emotional. Any kind of excitement or depression will skew your viewpoint and hinder good analysis.
It’s never too late to change course. If you’re on a sinking ship, jump – don’t fall prey to the sunk cost fallacy.
3% per week is simply not credible. No matter what you think the business is, no matter who is backing it up, 3% per week is not credible.
Avoid getting into situations where your responsibilities to others stand in the way of complete transparency. If you find yourself even tempted to lie to anyone out of a sense of responsibility to a group, you need to re-examine your position. The occasional white lie may prevent divorce, but it does little to hinder scammers.

Personally, I’d add an 8th item to this list: Even if you’re 100% certain that the person you’re dealing with is decent and honest, there’s still a chance that the people they’re dealing with aren’t. Smart and honest people fall for cons too, so don’t make your decisions based on your trust in them, find out who they’re trusting and make your decision about that guy.

On an un-related side note, because I’m curious (and because I’m now addicted to posting opinion polls) – Do you think it’s all right, even under these circumstances for Nefario to have publicly released Alberto’s identification documents? Is publicly outing the ID of a scammer okay or should those papers only be in the hands of the authorities?