Lately I've been thinking that if this wasn't merely an arbitrage play that it is possible he thought that, given enough coin, he could purchase for his benefactors (this "don't ask, don't tell" group) at a very low price (~$2.00) then sell at a higher price (~$8.00), and make up for the difference by providing the people he borrowed from some of the "extra" sold coin.

The problem is that the people that purchased from him wanted a lower base price for their bulk coin purchase than he was able to provide, so he ultimately ran into problems as the price continued to increase.

Of course this theory would require we ignore any Silk Road ties, any money laundering ties, and focus exclusively on Pirate actually having some sort of hedging experience. I'm not saying that he doesn't possess such skills, but he obviously didn't have enough of them to have made money off of the endeavor.