Bitcoin Forum

I so found this tidbit about Pirate on r/bitcoin:


[–]px403 4 points 1 day ago
I used to buy coins from him in blocks of 100 and 500, and I was one of his smaller customers. He has an extremely good reputation for being able to move a ton of coins very quickly. I never invested in his savings and trust though. From my observations, his business would be greatly helped by the higher liquidity granted by large numbers of investors, and at the premiums he charges for large volumes of bitcoins transferred quickly, he could easily pay back 7%, at least for short periods of time.
The 7% was his highest rates too, and he dropped them when he had more investors than he needed. When more investors dropped out than expected, he likely got frustrated and decided to go back to handling the liquidity himself.
That said, it will be very interesting to see of he can pull off a clean dismount without going broke himself, but I do think that it's very possible. Will be fun to watch :-)


I could care less about the speculation in the bottom part, but the discussion of his possible business model did. Could he be offering to buy/sell large amounts of bitcoins quickly for fees? I could see this as being somewhat valuable, but I don't really have much knowledge on  BTC exchanges. If he could offer a way around the huge price spikes/declines when someone buys/sell a large amount of coins, i could see it being a source of income.

Could anyone offer some info/speculation on this? Try to refrain from talking about ponzis and focus on the actual value created by this service and the exchange risks.

This is one theory going around. It would be worth a fee to route around ID requirements on Mt Gox et al.

How illegal would this be?  I mean, if he's handling lots of coins, wouldn't he be subject to AML?  For all we know, he could be laundering money for terrorists!

/panic

Why did he not announce 0 interest after closing down though. He's also stated he didn't have the coins to do a full payout. Doesn't add up if it was all on fast bitcoin transfers.

As to AML, that mainly affects financial institutions. Tax would apply on the USD gained, though, and thus reduce actual profits realized. Assuming he was above board.

Its not that easy to get large amounts of bitcoins easily and without a money trail. For all we know he was hiding assets in divorce cases. There are many cases where people would want to avoid scrutiny when moving cash around.

The question then becomes where did pirate get large amounts of bitcoins from to sell for cash ? There could still be a  money trail with such large cash movements.

I can't imagine anyone needing to move that amount of coins paying 10% over/under market prices. I mean they got to be about the stupidest rich people I know.  We sell very large blocks of coins (largest deals in the mid four figures of BTC) and I can't imagine we would sell any (much less 500K BTC a week continually for months) if we raised our fee to 10%.  I also know (indirectly from clients) that another major company does direct sales of large amounts of bitcoins at roughly market rates so we aren't the only ones.

I mean what idiot buys a commodity at 10% over price.  Slippage on a 1000 BTC is closer to 1%.  Hell you could get a 10 homeless people to walk into CVS using Bitstant and move $10,000 a day.  The fee would still be cheaper (and less risk).   Buying coins from a guy named Pirate on the internet for 10% over cost has to win the darwin award for both the riskiest and most expensive way to buy coins.

Also one would have to believe that demand was so good that he never needed to reduce his LoC.  Not once, not a single slow day.  The days prices spiked up 30% in a day his business never skipped a beat.  He maxed out available sales, day after day after day.  He just borrowed 500K and never needed a bitcent less.  Well actually he borrowed as much as people would give and rolled over all interest as long as they wanted.  That just happened to be 500K there is no evidence he would't have borrowed 10x as much if people were wiling to lend it to him.  Still even if true wouldn't he have used this never ending fountain of unbelievable profits to pay down his debt and keep more and more of the gross profit for himself?

So Pirate
a) found the largest collection of rich idiots on the planet
b) had so much demand he never needed to cap deposits, return funds, or disallowed compounding the interest
c) despite that gold mine it never occurred to him he would have more net profits if he paid down his debt?

I guess some people will believe just about anything.

Reminded me of that post :

I didnt say it was believable but this is the business model pirate himself posted in  a thread.  The fact pirate never dealt with any of the large bitcoin sellers out there is telling.

Anyone who has tried to move between real cash<->bitcoins quickly has experienced the 'joy' that is gox/dwolla/wire/etc. It's impossible to do fast.

Spot Rates are a very common thing in the financial / commodity world. People pay extra for speed and guarantee. Seems not so far fetched to me that someone made a very profitable business out of doing that for bitcoin. Not sure where it went wrong, but someone obviously miscalculated somewhere.

I am going to take a guess but if it ever was a real venture it "went wrong" with the borrowing at 3400% APR.  

To allow us extra liquidity we took out a BTC line of credit at 29.61% APR and secure the right to repay within 30 days notice.  Even that interest rate is a significant expense and one we watch everyday to weight the utility vs the cost.  So far the utility makes it a worthwhile expense but if that ever changes we will drop it like a hot potato. 

3,400% APR?  LOLZ.  No business borrows at 3,400% APR.  Hell even the mob doesn't charge 3,400% APR because it will kill any profitable venture and bleeding a company over time is far more profitable.

Like I've been saying all along: BTCST popped up right around the time MtGox dark pool trading ended.

I still think it could make sense for a bunch of early adopters holding millions of bitcoins between them to have had Pirate run this as a way to drive up the value of bitcoins. It does seem like there is nothing like massive amounts of HYIP action to get a fledgling currency off the ground.

Of course the catch in this theory now is why this extra delay? Why not just hand him the half a million coins to pay everyone off?

Maybe buying up all the debt though, to minimise how much ends up getting paid off, might actually further help maintain the value of bitcoins?

-MarkM-

EDIT: Wow, the silence is deafening all of a sudden... :)

Or they could invest in or start new Bitcoin businesses.  That would increase the value of the currency and the investors don't have the Pirate risk of losing everything when the Ponzi inevitably defaults.  They also won't be responsible for a Bitcoin panic after the default.  Investing in pirate is just a terrible idea for everyone.  Investing normally is a good idea for everyone.

I don't think you understand what I suggested, which, if it is an investment at all, is an investment in marketing / advertising / propaganda; also, no default would be involved. People with millions of almost-worthless bitcoins hand out a few hundred thousand to people to increase interest in the coin. Before they are done, the coins are no longer almost-worthless. Yum yum.

-MarkM-

EDIT: Also, a lot of investing in business costs fiat. This plan costs bitcoins, yet could suck fiat into the system. To the extent any "ponzi" is involved, bitcoin itself in whole is the "ponzi". This plan is merely a marketing campaign.

Look at it from Pirate's perspective.  If Pirate's the dark pook he needs a certain amount of liquidity to operate.  He can close in on that number by enforcing deposit limitations and cutting back on his interest rates (discourage investors).  He needs to forecast what his weekly liquidity requirements are because if either the interest rate or the amount of cash on hand goes over this magic point the interest payments cut into his bottom line and don't improve the business.

Why didn't Pirate fiddle with the interest rate or limit deposits week-to-week?  Not doing so only hurts his business.  What if Pirate had a few bad weeks?  Why would you let your business be crushed under that mounting expense and not try and rope it down a bit?  Why didn't Pirate fiddle with interest rates depending on how much USD or BTC he had on hand?  Why didn't Pirate fiddle with interest rates in response to the changing exchange rate to get some relief from that huge, compounding BTC debt?

Clearly I don't.  I would like you to make a detailed post explaining it so I can get my head around this business plan.  I'd imagine the other forum users would like to read your post as well.

Okay, lets say we have an obscure newfangled currency we invented, of which we have shitloads on hand, but for some reason common Earthlings don't seem to think our wonderful newfangled currency is actually worth much, if worth anything at all.

Lets also say we don't have enough fiat on hand to offer to buy a few million of our newfangled currency at dollars apiece.

However, our newfangled currency cost us almost nothing to create. If we could get a dollar apiece for it we'd be stinking rich.

Now if we were prepared to sacrifice a few hundred thousand to pay out as "interest", we could start up a nice HYIP, denominated in our currency, so the whole already existing panoply of HYIP-marketing channels could pick up on us.

If somehow our coins are already fetching a dollar or more per, like bitcoins were last year after the crash, that would be really helpful because we would not have to spend any fiat ourselves at all in order for people to see there is a market for this "interest" we offer to give away to them.

The only "catch" to getting this "interest" from us is, you have to have some of our currency first, as we only "pay interest" on our own currency, not on, for example, fiat currency. So if you want in on these amazing "interest rates", you gotta find a way to get hold of some of our currency.

It can be easy to pay 1%/day for a long period of time under the right circumstances. One such circumstance is that of having millions sitting around that cost you almost nothing and that would in fact drive their own worth down to almost nothing if you actually tried to sell them. So you probably actually want people to re-invest rather than to go cash out right away, because even just the few hundred thousand you plan to give away in this "promotional campaign" could actually drive prices down if more people cash out than are being attracted in. This is the weak point in the plan, because of course all experienced goldgame-players aka HYIP-players know to get their seed coins out as fast as possible so as to be playing only with their earnings. Luckily plenty of people who for whatever reason fail to execute that tactic play goldgames / HYIPs...

-MarkM-

I'm sure that all made sense in your head.

MarkM, your thinking makes no sense. Bitcoin was already trading for dollars rather than cents before Pirate started up. I have the same question ldgrn has, why no changing of interest nor changing of investment intake (buy in waves, etc.) once he opened up to wider investment? That just doesn't make sense on the face of it.

My opinion is that pirate isn't as smart as people give him credit.  Indeed, the abruptness of the default, the information that was available and subsequent track covering indicates this wasn't very well planned out at all.  My guess is it that whether BTCST started as a ponzi or not, it simply got out of hand and pirate is now shitting his diapers trying to figure out what to do.

That's certainly another possibility. He's had so much help from people running pass-throughs, making up reasons why this could work, and generally defending him, that he could pretty much just sit back and watch the money roll in.

OK, apologies if I strawmanned your explanation but here's what it sounds like to me.  You've got Pirate backers with assloads of BTC.  They're giving BTC to pirate (let's say half, bs number) which he uses for the interest.  The backer's gamble is that the popularity of Pirate's scheme will drive up the value of the BTCs they didn't give to Pirate, putting them ahead and growing bitcoin.

This still doesn't beat out starting/investing in a business: if you took half of your BTC and started a business, not only would the half not invested grow in value as the BTC economy grew but the business could pay you back your initial investment through dividends and equity sales.

It also doesn't explain why Pirate's having a bitch of a time paying people back.  Your model has Pirate's backers and Pirate never touch any USD so why is he taking so long to repay?  Pirate himself has said on IRC that he doesn't keep BTC around.

Remember that bitcoin looked back then to many observers as if it was tanking. Its not like you could have sold a few tens of thousands to finance a business without driving the price into the ditch...

-MarkM-

You have to solve the chicken and egg problem of creating new Bitcoin businesses somehow.  Why not get the first mover advantage and dominate a market?  Why not use all these really cool unique to BTC advantages and create a killer app?  Becoming the next Google is the reward, dropping the price down in the short term is the risk.  You'll always have the True Believers as customers even if the BTC trades at .01 USD again.  Adding more speculators won't solve the chicken and egg problem.  I don't think bringing in speculators would even give you more customers down the road - they're all in it to take a profit and get out.

I don't think anyone with business sense and BTC would follow through with what you're describing.

edit: the chicken and egg problem is "I don't want to start a BTC business because I have to work with USD suppliers.  There aren't enough B2B BTC businesses yet so me operating a business just drives down the price."  This is pretty flawed - even if people are just running through the BTC system like Silk Road customers do it's just short-term pushes up and down in the exchange rate that balance out.  Also, you can solve it by growing a pair and diving in yourself (as I explained above).

Yeah it would have made more sense right at the start, not after the $30+ bubble.

-MarkM-

Before or after the bubble it's still a giant BTC-wide pump and dump.  You're saying all the big hands (Pirate backers) are in it to wring the later masses dry?  Bitcoiners may be dumb but I don't think the community is rotten to the very core like you're saying.

Of course they're not. Pirate is contacting all the passthrough operators as we type to arrange the payouts, it just took a little longer than he hoped.

-MarkM-

:)

Why so negative? It wouldn't be a pump and dump, it'd be a pump up to some decent operating level and keep on trucking. All this hovering in the low double digits is silly, its peanuts, way to small to make bitcoin useable as a unit of account in any decent size projects. It needs to get into at least the three digits range and stay there, still on a good strong steady bull-run.

-MarkM-

If we are both being sarcastic/ironic, then absolutely. Otherwise maybe not...

-MarkM-