Bitcoin Forum

I'm guessing there is a lending bubble.

I'm skeptical about how people can afford to pay 2-5% percent weekly interest (a 180% annual to 1160% annual rate).  You cannot produce more than a 10-15% annual return without taking risks.  And to get anywhere near 50% you need to take major risks.  With Bitcoin, good miners can maybe make a 50% annual return (though that assumes the hardware doesn't go bad).  So people are not using this money for productive investments. They are using it because they are addicted to spending more than they earn (or are undergoing a short-term hardship).

The only reason I could see people borrowing money is if they are very short-term loans for purchasing drugs on Silk Road, or avoiding some kind of large fee (like a bank overdraft fee).  For the long run, I think a drug-buyer would realize that they can get more drugs for the same amount of money if they don't borrow.

You can get credit cards with interest rates of 20% in the United States and many other countries (average APR as of Feb 2010 is 14.7% -- http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Interest-rates-APRs-credit).

According to Consumers Union (http://www.consumersunion.org/finance/paydayfact.htm) payday loans have rates of up to 17.5% for a loan that ranges from one week (a 911% annual interest rate) to 4 weeks (212% annual rate).  I guess the lenders are competing with that market in terms of interest rates, but in this case you don't have any collateral other than a weak internet reputation system.  If you are lending to the least trustworthy clients, you really want collateral.

I'm guessing that, like the US credit bubble, the Bitcoin lending bubble will burst as borrowers default and the loan shark lenders will lose money.  Unlike the US bubble, nobody involved in Bitcoin will get bailed out.

I'm wondering if this will have a negative impact on the value of Bitcoin.

There are non-interest fees.

For example I closed a deal on some GPU but I didn't have the coinz.
Seller said he would take Paypal but I had to pay the fees.

Instead I asked for a 2 week loan @ 3% interest and used my hashing power.  Now as an interest rate I consider 3% for 2 weeks (216% APR) to be high but I would have paid the same for using Paypal.  If I had enough coins I never would have taken the loan.

The other options was to put a deposit down and wait for Dwolla to clear.  Due to limited rep at the time they wouldn't ship until funds cleared.  Now Dwolla had negligible cost but it would have taken a week.  At the time the cards were earning about 3% of their value (net) per week.  So waiting would still have cost me 3%

Paypal - give 3% to banksters
Dwolla - lose 3% revenue waiting a week
BTC loan - give 3% interest to lender, keep entire transaction BTC only, and help improve BTC economy.



I agree the high interest rates in generally do indicate some bad due diligence.  It can't all be for productive purposes and that means either the lender or the borrower is making a bad decision.

When loans burst I don't think it will have any effect on Bitcoin.

So one possible reason to use this service is because it is hard to get regular money into Bitcoins. Probably a lot of people don't have balances at an exchange, and getting money to an exchange (and setting up an account) takes time.

That said, if you aren't mining, you'll need to pay back the loan in BTC and setup an exchange account to do that.

There is way more to it than that.

One of my local buyers of coins paid roughly $1/coin over the exchange rate to get coins this year (about $1000 worth).
I must also be one of those brainless (I am a Starfish after all) lenders losing lots of money on lending (think I'm up to 300 coins in bad loans so far).

However, I pay interest on deposits around 6.5%/month and spent some time explaining this to someone why this was my next cheapest source of funding despite having cash sitting in an account earning 5%/year.  I also have done some (limited) borrowing and have an 8% 500 BTC loan with someone.

But, on the other side of the lending bubble, yes, there are good rates to lend at, and some might be going into god-knows-what.  Other people need bridging finance as funds clear, and getting a good deal on a GPU in BTC might mean the difference between saving $100 and missing out.

Also, I expect the rates to come down significantly as the volatility in cross rates falls, and some of the other sources of funds squeeze down the payment levels.  Until then, and I'm planning on it happening, I'll make a few coins.

Lol. You cannot even break even without taking risks considering fiat's value almost always declines with time. There will always be risks, but high risks do not always equate to a bubble. Ideally, lenders should be diversified enough to be able to suffer a default by Pirate. I am wholly convinced he is the reason we demand high rates and pay out high rates. Were Pirate to default in current conditions, the lending market would be destroyed (consumer loans have a high rate of default and usually relatively poor returns), and the price of BTC may swing wildly. He has in excess of 40kBTC borrowed ATM, and I suspect his total BTC assets would shock many. The idea that he's not earning more than he's borrowing, at this point, is pretty ludicrous (I do believe the vast majority of lendees are making significantly more than they pay, as most money goes toward business ideas, not individuals [afaik]). I don't think anyone's put in a solid effort calculating how much Pirate's paid out in interest, but I'd be very surprised if it wasn't at least 2x the amount he currently is borrowing.

Pirate effectively (factoring in compound interest) pays out well over 30% MPR. Since his investment requirement for full rate demands at least 2,000BTC, the risk/opportunity is largely confined to lenders. There's a very large barrier to entry, both in lending (due what I believe is poor quality in consumer loans) and "pirating" (due to extremely high capital requirements). There are almost no lenders who are not lending to Pirate, either directly or indirectly. More than anything else, I believe that is the "bubble." Depending on what Pirate may be doing, he may no longer bother taking loans in the future - or maybe he will, but the total amount he wants to borrow may make up a much smaller portion of all lenders' assets. Either way, I think that "artificial" inflation of interest rates on BTC loans will eventually decrease.

Aside from Pirate & the lack of government interference (which works both in and out of BTC lenders' favor), BTC & USD lending also differ in that BTC makes up only a fraction of most lenders' assets, I imagine largely because of the extreme currency volatility (I don't want to keep all my assets in something which swings 5-20% per week). The Bitcoin market cap is pretty darn tiny compared to any major currency's. If lenders suddenly lost all their Bitcoin assets, I don't think anyone would have a problem paying off their deposits just by converting fiat to BTC. It kind of takes away from the idea that Bitcoin is a serious currency rather than a play-thing, though.


tl;dr - definitely in an interest rate bubble. Rates will eventually lower, but probably not for consumer loans. Instead, more businesses will likely be able to get the funding they desire. I don't see any "destruction" (creative or otherwise) occurring due to it, however. At worst, a few lenders might quit playing if Pirate defaults. In the extremely unlikely event of a lender defaulting (outside of the cause being that person dying without a will for his coins), I would think the rest of us would consider paying off his depositors just to ensure it remains thought of as a fairly safe investment. After that, some type of FDIC-like insurance agency for depositors might pop up. I'm rambling o/t again, though.


ETA: I always feel like a dick bringing up the possibility of Pirate defaulting, as if there's reason to suspect him of doing so. I only intended to point out the possibility, not trying to say it's likely. As I implied, I don't think Pirate's any type of ponzi merely because he's consistently paid, and likely paid multiple times the total amount currently lent to him. Can't really assess risk when he's so opaque, and that's not meant to suggest anything negative. Pirate is a Bitcoin-weighty fellow who's very involved with the lending market -- having a discussion on a possible Bitcoin lending bubble without Pirate is pointless.

The BTC-DIC or better yet the BDIC = Bitcoin Deposit Insurance Corporation.  I like it.  But what a PITA to set up and run.  Bank audits and bank auditors, setting premiums with no real default rate information, monitoring claims of participation by banks, making sure that only banks that participate can advertise participation, what could we do to banks that claim they participate in the program but do not - or to banks that participate but do not pay their premiums, handling that first default (large or small) - my head spins.

BTW even with only two default on my books (asshats: gurg2.o and doubleicaras) and charging what you are calling too high an interest rate I am just barely profitable in my consumer loans and not making anthing more than "hobby" money.  If anything, the rates on consumer loans are generally too low to be sustainable - until we create a better consumer credit reporting system.

Glad to have you on board since you are the second leading cause of the "lending bubble" ;)

Thanks for the 0.5% relief by the way!

Matt says someone from the Downtown Athletic Club of Orlando is working on a revolutionary new credit system which'll be advertised with the first issue of Bitcoin Magazine..... soon.

We're talking about BDIC in Skype. Premiums paid by member banks + banks can then advertise how safe they are+ public BDIC address for public to verify + multi-sig for multiple voting Board members who are able to disburse funds to depositors in failed banks... ....... Be-dick? maybe we should take the "DIC" out of it somehow? NCUA... National Credit Union Association (isn't that synonymous with National Credit Association Association?).... International Bitcoin Lenders' Association? IBLA? Lenders Organization Accruing.... Not-distrust. .... Simply "Lenders' Union"?

There is a competent web designer or two in the Lenders' group.... Maybe it's time we start to really organize as a collective. Maybe it's time to issue fiat notes to people. We could call them BitCons... You can deposit them at any bank of your choosing for additional fiat BitCons and a sub-market could develop using this meaningless accounting system. ... .... o.O ......... Wait....

Majority of the loaning i do is "i have 4.xncjakbfBTC" That would beeee.... (fake) $49.99, Great, Now i cant take out $60 at my banks ATM at 2 in the morning... Unless i get More coins...
I could wait untill morning and have (fake) $55.55 but thats still not enough, I'd have to wait a second day.. DAWN OF THE SECOND DAY, I have 6.cndsncBTC that gets meee (fake)$59.99 FUUUUUUUUUU, I should've gotten a loan two days ago!.

Seems very trivial and minor, And it is. But i cannot see a negative impact for the bitcoin community other than the massive "eveyone is underselling thier coins" , But really, Were going to do that anyways, I think it's the perfect balance between a "Do it and Pay for it" service to have intrest, And the intrest Comes from coiners, And goes to coiners, But the Fiat, Goes to merchants, Allowing people to more frequently use coins as a realistic method of purchase.

Work doesnt pay you Daily, And if they did, You'd be pretty tempted to spend money considering that it's just landing in your hand at the end of each long hard day.
People go on spending sprees when they get---- Im rambling...

TL;DR=btc loans help the btc and Real economy, I dont see where the harm is coming from.

I think this analysis is somewhat simplistic, and ignores many of the aspects that make bitcoin lending unique. First of all, in a hugely volatile market like this, short selling is common, as are arbitrage and similar deals. Borrowing to make more money from deals like this is an obvious thing to do, and if they work out, they can easily make more money than the interest rate.

Second, low interest rates in "the real world" are supported by what I've previously called (https://bitcointalk.org/index.php?topic=73599.msg816149#msg816149) an economy of scale on collections infrastructure, which none of the lenders here has anything close to. Furthermore, getting low-rate loans from a bank (or even a credit card) is contingent on many things that do not apply here. We (often) don't ask for proof of identity here, or collateral, and have very little legal proof against you if you do choose to default. This significantly lowers the barrier to entry for people seeking loans (even for nefarious purposes that wouldn't stand at all in mainstream finance), but the lowered barrier to entry also carries a higher counterparty risk with it for the lender, which needs to lead to a higher return for the incentives to work out.

Finally, possibly even larger than counterparty risk is simply exchange rate risk. Most of us need USD (or local fiat) a lot more than we need bitcoins, so their exchange rate with mainstream currencies is a crucial aspect of the value of a loan. Sure, we could lend out 100 coins now and give you almost $500 worth of coins, but if you pay us back 600 coins in 6 months and the value has dropped to $0.10, we've just lost a lot of money. The opportunity cost of me lending you 100 coins for 6 months back in June 2011 is pretty huge. We went from over $30/coin to around $2 in that period. I'm not saying that we could have predicted that $30 was the peak and sold there, but it's a major factor in risk calculations, and thus contributes significantly to interest rates.


In short, if you want to set up the whole collections and legal infrastructure that underpins "real-world" loans, giving us full legal recourse and access to cheap legal advice for pursuing defaulted loans, then interest rates can drop. If you can stabilize the bitcoin exchange rates, the interest rates will drop even more significantly. But I don't consider the current situation to be anything remotely resembling a bubble. It certainly isn't ideal that the cost of credit is so high, but it's a necessary feature of this young market. I do acknowledge that IBB gives out loans for free, but they tend to be small, and senbonzakura has higher trust standards than other lenders, thus limiting overall access to loans.

Don't assume that we're idly sitting around becoming fat cats here. Lenders make a lot of money on successful loans, but that's amortized across defaulted loans, so to apply the word "shark" to us is insulting. A few of us are working on improving the credit situation to give lenders a better picture of credit history and creditworthiness, and overall to streamline the whole bitcoin credit business. These changes don't happen overnight, though :)

Right now I'm willing to accept the "high" interest rates in the BTC lending industry as it is very hard to verify legitimate lendees versus scammers. With time I'm confident a system will form either through word of mouth or a unified reputation tracking system(like heatware, ebay feedback, etc).

You mean like Bitcoin-OTC?

Would prefer something that combined tracking for users outside of the limited bitcoin economy. There are individuals, like myself, who have reputations built up over years within over communities that don't help due to not being something used within the bitcoin economy. I suppose what I'm looking for is a universally agreed upon reputation system not unlike eBay's feedback ratings. Not everyone wants to sit in an IRC channel trading BTC to build reputation.

Not everyone does sit in an irc channel trading BTC to build reputation.  While the url is bitcoin-otc, the ratings aren't strictly BTC based.  In addition, ratings aren't based on trades, but on trust.  You might not have ever traded with someone but still trust them with your kid's life. You'd rate them accordingly.

Now someone is pointing out the bubble. there is still time before it burst. You still have time to run.

Do ebay feedback ratings tell you how much debt someone has?  How about heatware? Exactly.

Did you just ignore everything everyone said to refute the bubble claim?

Now now, obviously it must be a bubble because people in here are so deluded that they deny it! ;)

It’s not a bubble because of

1) Currency Risk

2) Counterparty Risk

3) Not efficient market yet

4) Affected number of people and volume, even with pirateat40, is insignificant in Bitcoin world.

Interest rate is likely to decrease over the long term as these factors change, but it will not "burst" and create havoc.

Any questions?

I'm impressed.  This thread looks like 90%+ of the lending business (lenders) contributing to the OP misnomer.  I can think of a couple that haven't written something, or who don't need to.

btw - I agree with znort - having been talked through GPG signing by INAU in slightly under two hours and going on IRC, I haven't been back since.  It was a giant PITA.

Borrowers aren't smarter than other investors.  In fact I'd argue they are less smart.  Any investor with a medium level of long term success would have cheaper sources of financing from their regular assets or lines of credit. They are equally likely to lose money as make it.  The market is roughly zero sum.


Good points.


If the volatility can affect both borrower and lender why would it increase interest rates? 

If the volatility increases the interest rate, then can we hypothesize that this might indicate a general bull market mood?  For instance, this would match up with the bitcoinica indicator where there is greater demand for going long than short.


If lenders aren't making big bucks (eg. if we have lots of competition on the side of lenders which is possible - especially as the market matures), then there is a transfer of money from people who are paying high interest rates to those who are defaulting on loans -- which is also not ideal.

My general concern remains that high risk loaning increases the amount of speculation in the economy without increasing its more useful services/products base.  My optimistic view is that the lender market could mature through use of an online anonymous trust system (or other means of securing loans), competition, shared information, and reduced rates.
 

And this nicely encapsulates the current global financial markets.

Also note, that when the banks stopped lending (due to risks, GFC and other reasons), many economies around the world screeched to a halt.  Having a banking system here is therefore important to the bitcoin economy.

Also, and while this is a specific rather than general example, if you're a 15 year old wanting $500 for a speedy GPU to mine some coins, you're not going to get bank financing.  But with a few-month payback, the rates we're lending at makes sense.

Another problem is lender reserves.  Banks have reserves and often a minimum level is set by a central bank.  But BTC lenders can pick how much reserve they want to have. 

If you have an increase in defaults, then lenders will need to increase their reserves and this can trigger a small crisis.  This could be triggered by a BTC economic crisis or a non-BTC one (eg. like the 2008-2009 recession).

Inflation or Deflation could also cause problems.

Sure it's a bubble.

Loan(big) , wash(GPUMAX), escape.

But those reserves are set at stupidly low levels (below 5%).  The use of liquid funds definition becomes relevant, and any spare liquid funds are normally not held by the bank, but provided to a central bank to minimise actual cash held.  Ages ago I worked at a bricks and mortar bank - total cash held was around $200k at the branch, yet some accounts were many millions.

Most of my funds are liquid (held or on call) greater than 50%.  If I had all my depositors withdraw and all my term loans default I'd be mad as hell, but can cover every coin.

 
I think this is a gross overstatement. MPOE holds > 3k bitcoins in bonds this month, for instance. Unless the pirate holds > 50k or something the market will not be "destroyed", just some lenders will have learned the diversification lesson the hard way.

The price of the BTC didn't swing wildly with the linode hacks, so unless the pirate holds significantly over 50k it won't touch the price. Not to mention options dampen swings to begin with.

Where wasn't he talking of the price of BTC? In the place where he says "price of BTC"?

;)

Has anyone seen my pwny?

 
;)

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn

GPG keeps about 80% of would-be scammers out.  Generally, scammers are lazy.

Newsflash..  Most of us are...

Now get to work, there is 46 dollars on it...

Thunderbird with Enigmail.

You are missing just a few steps... like the whole OTC part...

Didn't think I did. OTC - Over the Counter, Mailing List (you know like the one everyone has on a regular basis)

Make Offer -> Click Reply All -> Accept Offer -> Click Reply All : Send P2P for details -> Complete Trade : Click Send All -> Confirm Deal : Wait for next Offer.

Plus with the caveat of it all being encrypted.

Lol, Yes as opposed to IRC from the 80's.

He did ask for Easy.

They do, but in an unexpected way:

The largest obstacle to a vivid economy is deflation and hoarding. Why would you spend a BTC now when you expect it to be worth more tomorrow? Why not spend USDs instead when you expect USDs to be worth less tomorrow? A commodity that is too dear to spend is useless as a currency.

The majority of the BTCs are concentrated in the few hands of the BTC rich. If their loans would work out they would control even more BTCs over time (due to high compound interest rates). That would suck the BTCs out of circulation like a black hole sucking in all the available matter.

Luckily the solution is simple: the black hole explodes spilling the collected BTCs all over the place. Loans go bad and BTCs spread out: from the hoarding few to the careless many. The law of entropy applies and the money remains in circulation. Everybody wins: except the few BTC rich who keep the economy alive by loosing their money on bad loans. But even they win: loosing half of your BTCs on bad loans but keeping the economy alive is still better then having 2x as many BTCs that became worthless because the underlying economy has stopped.

This - of course - is not true with fiat currencies like the dollar.

You can bring 500, 1.000, 10.000 or 1.000.000 USD banknotes in circulation to keep up with inflation.
See http://en.wikipedia.org/wiki/Hyperinflation (http://en.wikipedia.org/wiki/Hyperinflation) for numerous examples in recent history.

Similarly US dollars can be subdivided by the federal bank to infinity.
Nothing prevents the FED from printing 1 cent, 1 mCent, or 1 uCent banknotes if deflation requires their daily use.

Most things that are worth doing are not easy. OTC registration is one of them. Its just like many aspects of the business world - if you want to taken seriously, you have to jump through a few hoops first.

Oddly enough, I've received >$10k in deposits and never registered for the damned thing.

Similar - did a lot of business before doing the OTC thing.  I have done some ratings recently (only took 30 minutes), but playing with a few other bits and pieces.

I do have people send me BTC500 deposits as that's a sensible level, and they get paid back too.  (had 1000 coins returned to happy owners in the past few weeks)
Currently, I'm paying interest on more than 3000 coins (that's about 0.0001/sec if I bother to watch in real time) and have some nice interest payments arriving regularly from different loans.

Well, I didn't mean to imply that OTC is a requirement to exchange funds, but that's how it is being read, seemingly.

OTC is not the only way to build trust, that is why you guys were able to do without it.

No, we were observing, as you have, that there are multiple ways of doing things.

or be like me and do both!

I'm now thinking this is mostly about the Pirate bubble  (the Bitcoin Savings and Trust ponzi scheme).

How long do Ponzi schemes typically last?  Are there any research studies done on this matter?  I'm guessing that the higher the interest rate, the shorter the duration.

It looks like the original Charles Ponzi scheme lasted around 8 months. He was doubling investments in 90 days.

The first MMM ponzi (Russia 1994) lasted 6 or 7 months.

The second MMM ponzi (Stock Generation) lasted two years - because they had rules that let them arbitrarily reduce the amount in your account (even down to zero).

The Romanian Caritas ponzi lasted 2 years and 4 months.  8 times return in 6 months (same as 100% in two months).

The Madoff scheme lasted a very long time (20-48 years), but gave much lower returns (as low as 10%/year).

Bitcoin Savings and Trust is almost 6 months old and returns 34%/month.

It seems that giving out 40% interest per month is fairly typical for Ponzi schemes.  There is probably a balance between having a very high rate to get people to join, and actually being able to pay it out - which is why they don't promise 100% monthly returns.

If I exclude my personal Pirate deposit from the other stuff I do with bitcoin I am still making monthly returns comparable and higher to annual returns in local currency.  While many people think Pirate is the lynch-pin for the lending and returns, that is simply not the case.  Yes, it would certainly place a big hole in things, but other thefts have been larger and the economy survives.

Expectation: rates will come down, and I have that in my medium term plan.  But while returns are still high elsewhere from productive activities, rates stay high.  It is what the market is prepared to pay.

What kind of "other stuff"? If it is related to Bitcoin lending, there is the problem that the rates you can demand are affected by the availability of pirate interest rates.

I have thought this over and must agree it can be viewed as a bubble. The relevant question for me is whether interest rates will be maintained for as long as possible, and collapse all of a sudden, or if they will gradually decrease.

With regard to the BTC/USD price, I believe that the former option would be bearish, while the latter one would dampen price increases.

First off, FPS&T/BS&T has been around longer than 6 months. 

Second, you've yet to actually prove its a ponzi, therefor the rest is just idle speculation.  What else you got?

Other stuff:
I have long-term enduring investments with several people.
GLBSE has been a source of some great trading profits during April.
There are some BTC backed loans for non-BTC ventures.
I invested in a manufacturer recently - returns yet to be determined.
Lots of the loans in my book are for equipment/trading/non-lending arbitrage.

If I didn't have my Pirate account, the remainder of the coins would still be working hard, and people borrowing are prepared to pay 10-15%/month currently.  My own expectation is that the rates will decline slowly.  But for now, I'm able to pay around 7%/month on deposits and make a margin.

As of today, Bitcoin Savings and Trust has now been around 7 months if the Nov 3 post thread date is accurate.  I'd be happy to hear the official start date if I'm wrong on this one.

As for proof that it is a Ponzi scheme, I will openly admit that I am speculating. However unlike Pirate, I'm willing to share my analysis and am not making any money on this.  Pirate refuses to share any meaningful business model and wants to take your money.  His defenders are profiting (at least on paper) from the Ponzi.  Who would you trust?

What's your analysis? that you cannot fathom a business plan that pays 1% a day?  That explains why pirate's starting ventures and you're just trolling the forums.

Hmmm, yes, who would I trust?

In my bank account, I have a lot of dollars.  It's not "on paper" as my wife sees it in the bank account.

It might interest you to know that my deposit with pirate, paying out well over 100% now, is not the most lucrative or highest paying investment I have here, and they certainly are not ponzi schemes.