Bitcoin Forum

Hi all,

I thought I'd get the ball rolling on credit derivatives (because everybody loves credit derivatives, right?) by offering to sell 1000 bitcoins worth of 6-month CDSes with imsaguy's Open-Ended Investment Opportunity (https://bitcointalk.org/index.php?topic=60117.0 (https://bitcointalk.org/index.php?topic=60117.0)) as the underlying reference entity.

This offering will be structured as ten 100-coin contracts. Buyers will pay me monthly fees for the contracts, and if imsaguy defaults on his debt, I will pay the buyer the value of the contract. The contract will also cover the less extreme credit event of imsaguy being more than 48 hours late on any payments due to his investors, in which case it will pay less than the full 100-coin liability.

If a buyer misses the monthly CDS payment by 48 hours, I shall consider the contract terminated and will offer no default protection beyond that.

I have contacted nanotube, the founder of the IRC OTC channel and one of the most respected people in the bitcoin community, to act as a neutral arbiter for deciding whether a credit event has occurred.

This offering will be held as a Second Item Auction (sometimes called a Dutch Auction; see http://en.wikipedia.org/wiki/Dutch_auction#A_second_item_auction (http://en.wikipedia.org/wiki/Dutch_auction#A_second_item_auction)), so anyone who wants these should just post how many contracts they're interested in and what percentage they're willing to pay as a fee. Bids should be phrased as a percentage, which represents what fraction of my liability you pay me in fees per month. I set a reserve of 1% (100 basis points, if you prefer finance lingo) on the contracts, so bids must be greater than or equal to 1%. To avoid too much clutter, let's do bids in increments of 10 basis points. As the wikipedia page explains, winning bids will pay whatever the lowest eligible bid was. The bidding will run for a week after I post this. Sold contracts will provide coverage for 6 months from that day, with monthly payments on the same day of every month.

As far as my own creditworthiness, I have a good reputation on the WOT (http://bitcoin-otc.com/viewratingdetail.php?nick=copumpkin), and am well respected on these forums. I've also signed a statement on this forum linking my WOT identity with this one: https://bitcointalk.org/index.php?topic=66313.msg769294#msg769294. I have "lots" of coins (significantly more than I am accepting liability for in this CDS offering) and even in the unlikely even that those are somehow lost, I have other assets and a real job.

I will compile GPG-signed (with my WOT identity) contracts outlining all the terms so that buyers may use them as recourse against my reputation in the event of a dispute. To avoid creating perverse incentives for imsaguy, I cannot let him purchase CDSes against himself, and must require that bidders be reasonably well established either here or on the WOT.

So, if you want to hedge your investment with imsaguy (starting at just 10 btc a month for 1000 btc of protection!) or you just want to speculate on him defaulting on his investors, feel free to bid here. Or if you get nothing else out of all of this, you can see this as a monetary vote of confidence in imsaguy's creditworthiness :)

Free free to ask questions and I'll be happy to answer whatever I can. I'm also open to suggestions on adjusting the specifics of the contract. I can't say I have much experience actually dealing in CDSes, so some things might be a little funny.

Edit: I'll elaborate later on precisely what constitutes a default and what will happen if one happens, but I don't have time to write it out now.

tl;dr: there is no tl;dr :) Read what I wrote above. This stuff isn't going to cost you much money (but could cost me a lot of it), but it isn't trivial, so make sure you understand how it works.

bitcoin has already seen its Charles Ponzis, Frank Abagnale Jr.s and Hunt Brothers, but there's not yet been any AIGs.   yet.

crazy stuff.

Interesting.

Really? This is great!

Thanks! I would, but I need to think about what degree of exposure I'm comfortable about some more. I'm also hoping, as I said, that I get the ball rolling and other people start offering these too (hey, it's free money until it isn't! what's not to like? :P).

I bid 10% for all 10 contracts. sub

Interesting idea.
Waiting for the first person to offer insurance for copumpkin's liabilities  ;D

Not insurance, CDS

That's the point... make them so hard to understand that you just make money!!!

If we issues CDS' on Pirate debt would Pirate get to buy his own CDS' ?  He is a Pirate after all :)

Nope. We really don't want to give anyone an incentive (or lower the disincentive) to default :)

I'll sell you CDSes on myself, but you'd have to be pretty stupid to buy them :)

I'll sell some cdses on Copumpkin.

Cross CDS'  Hmmmm.

Next up, CDOs (and synthetic ones!). Let's see if we can replicate the mortgage crisis, guys :)

I only have one question. Who's going to bail you out when you are too big to fail?

lol he even allows the purchase of naked CDS.

I think the most secure default protection is the people loaning money to become so big that at all the loaners combined are pissed off enough to come and claim their money on default (or let a third party do that with some brutes).

I haven't seen this link posted yet in this thread.  Copumpkin wrote:

 "Why you might want to sell Credit Default Swaps"
 - http://bitcointalk.org/index.php?topic=74586.msg826093#msg826093

-----BEGIN PGP SIGNED MESSAGE-----
Hash: SHA1

I have provisionally agreed to be the event occurrence arbiter, subject to the creation of, and my agreement to, more specific definitions of credit events for the contract, which are currently being worked on.
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yu8An0GAo2uI2x5pz0R4jUAaq94GoVRu
=Ii36
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Sure, if you can find someone to trade with. If this becomes "a thing", we'd probably want to agree on some standardized contract amounts and dates, though.

Watching.

+1 and QFT. nanotube is a strong choice for arbiter

This offer to sell was added to the list of Bitcoin Firsts.  If there are actual buyers, please update the wiki to reflect the change from first offer to first sale of a Bitcoin-only CDS.
 - http://en.bitcoin.it/wiki/Bitcoin_Firsts

Not sure if the first loan coincided with the first short sale... but if so, then yes, I remember. :) October 28, 2010
https://en.bitcoin.it/wiki/History

sgornick: any reason the 'bitcoin first' page is separate from the older History page?

Ya, probably so that the History page was more specific to bitcoin, but firsts was for trivia and only true firsts.

Like maybe going to v0.6 release is enough to make it into the History, but not something that would go into firsts.
At the same time, the first food truck to start using bitcoin might be something suitable for the Firsts page but would be extraneous in the Bitcoin History page.

In the way of firsts, if copumpkin is offering CDS's, I'll offer the first CDS Options referencing his CDS which will be labeled 'OP_pump_kin_CDS' for puts and 'OC_pump_kin_CDS' for calls.

Definition:
CDS option: A credit default swaption or credit default option is an option to buy protection (payer option) or sell protection (receiver option) as a credit default swap on a specific reference credit with a specific maturity.

Derivatives are cool. It just so happens that they also tend to cause systemic risk in many cases.

Any takers?

Sorry for the delay on more detailed terms of default. There are some tricky bits I'm still working out, but I'll have them up soon.

Also, about people's requests for pirateat40 CDSes, I've decided against offering them. This is not because I don't have faith in him (I'm one of his largest lenders), but because it simply isn't in my interest to offer them. Selling CDSes on him carries the same risk as a direct loan to him, but necessarily earns less in fees than the interest that could be made in a direct loan (and there's not a good notion of risk-free rate for doing other things with the coins you get by not lending). Note that this isn't always the case, especially when it's hard for people to lend to pirateat40, either because they don't have an account with him or because he doesn't have the capacity to accept their coins.

I think we need someone:

with a very high rep
a lot of personal financial backing
that believes in Pirate and would like to loan to Pirate
is not Pirate
does not have loans to Pirate and will not have loans to Pirate

to sell CDSes on the Pirate loans.

aka you?

Nope since I am Pirate - just joking.
It is not me since I have loans to him.

Due to some outstanding open questions about aspects of the contract (preventing fraud, etc.), I'm putting the auction and sale of these CDS on hold until I can resolve them. It turns out that getting the details right in this setting is a lot more difficult than it might be in the "real world".

Sorry for getting people's hopes up! I'd like this to work, so I'll be thinking hard about how to resolve the problems and will post an update once I have more to say.

ROFL!

Anyway, sort things out and let speculation to begin... (Stacking my coins...)

PS. Can we have a little more info about you? it's just a nickname on forum now...

Is this going to turn out like Goat's buying LONG's on his own bond?

No.  I will refrain from purchasing as I don't need insurance against my defaulting ;)

Woo, zombie thread!

Hah, I was just kidding, so my real-life reputation shouldn't be necessary :) I'm not secretive though, so if you're just curious I can elaborate (or you can google).

He would have been purchasing insurance if he bought the .SHORT bonds.  The .LONG bonds are the people that are guaranteeing that the dividend will be paid.