In an ideal world, maybe that should have been the case. But in this world, it simply wasn't.

Perhaps it makes no sense, but it was in fact true. Patrick's business model and methods weren't a secret. They in fact *did* understand Patrick's business model well enough to make the judgment. If you look, you'll find some of Patrick's lenders arguing about this very issue in this very forum.

If so, why can't Patrick take what his borrowers told him at face value and rely on that? Patrick made precisely the same mistake those who loaned him money did. You're excusing his lenders but not excusing him.

I'm not sure I know what you mean by "assumptions". But the mistake was fundamental and inherent in the business model and lending environment. The mistake was failing to realize two things:

1) There's no way to enforce these loans in any court of law. That means if people have any reason not to repay, they won't repay. Many people won't sacrifice their real-world lifestyle and bank accounts to repay a bitcoin loan that can't be enforced anyway.

2) Borrowing from Patrick to invest in Pirate just seemed like too good a deal, especially since people knew they could just default on Patrick without consequences. No method would prevent this, short of actually tracking what each person did with the bitcoins, which nobody would agree to.

This is why Patrick's business failed. And there is no argument you can make why Patrick should have known this that doesn't equally apply to those who loaned him money.

(And, again, this doesn't apply to Kraken, which I think was likely an outright scam.)

Of course not. Someone who commits fraud can't blame those who believed him! In this case there is no common mistake, there are two different mistakes. Also, one party is committing fraud on the other party and the other isn't, so there's no equality of blame between the parties. So these aren't even remotely analogous. (However, both parties in this case did more or less equally defraud PayPal, for what that's worth. This is more like the classic 419 scam. It's fine to blame the victim for falling for a 419 scam, but it's important not to let that in any way excuse the fraudsters.)

The big difference is that in the case of Patrick and those who loaned him money, they *didn't* both know the risk. They *both* believed the risk that actually harmed them didn't exist. If you read the transcript, they agree that Patrick's business model provides him sufficient equity in his loan portfolio to cover losses associated with a Pirate default. They either didn't understand or didn't appreciate the significant *indirect* Pirate exposure the portfolio had. If either of them had realized this, the agreement would never have taken place. The critical difference is that they both have the same culpability for making the very same mistake in the very same way.

The contract doesn't "require" 1,500 pounds, it *assumes* 1,500 pounds. There are not 1,500 pounds. Similarly, this agreement didn't require Patrick's loan portfolio to be free of significant indirect Pirate exposure, it assumed that it was.

That's correct. If there is equal fault on both sides, then the losses have to be split somehow. To make your example perfectly analogous, say it's 1,500 pounds of cherries that are purchased. By mistake, the seller only loads 1,200 pounds of cherries on the truck and also by mistake, the buyer erroneously confirms there are 1,500 pounds of cherries on the truck even though there aren't. In that case, they have to fairly split the damage from their common mistake. It's inequitable to make the buyer pay for 1,500 pounds of cherries and take 1,200 just because he mismeasured given that the seller mismeasured too. But it's also inequitable to make the seller cover 100% of the damages from the incorrect loading given that the buyer made the same mistake. You have to come up with some fair way to split whatever damages flow from the common mistake in measuring the loading of the cherries.

They didn't "make a claim to deliver 1,500 pounds for $3,000". Please read it over again. They agreed to deliver "the 1,500 pounds of cherries we agree are in the truck", something that does not exist.

And common mistake has to hold in pretty much every jurisdiction. There is no other choice in cases where the contract is premised on a common mistake. In the example of the common mistake about the quantity of cherries being sold., you can't make the seller deliver and the buyer accept the 1,500 pounds of cherries in the truck because there are no 1,500 pounds of cherries in the truck. "Enforce the contract as agreed" is ambiguous because it could equally well mean the buyer has to take whatever is in the truck even if it's not 1,500 pounds or the seller has to put more cherries in the truck -- and neither is what they agreed on. And even if you did enforce the contract as agreed, if that doesn't split the harm equitably, one party would have a cross-claim against the other that you'd have to resolve anyway.

Generally, common mistake applies if the contract is about something that doesn't actually exist or doesn't exist as contemplated in the contract whereas cross-claim is used when it's possible to enforce the contract as agreed yet that leaves one side harmed by the other's mistake even where the mistake is common. To an extent, common mistake is redundant. If execution of the contract as agreed is impossible, you don't need common mistake to invalidate it. If execution of the contract is possible despite the mistake, the common mistake would constitute a cross claim anyway.

This case is on the border somewhere -- it's hard to tell whether it's possible to enforce the contract "as agreed" because the terms are insufficiently precise. This is one of the huge advantages of written contracts over verbal ones. If something unexpected happens, the written contract usually gives you a resolution. However, it often also tends not to be a fair resolution. (For example, in the case of the misweighed cherries, the contract likely would say that the seller's written acceptance of the load waives claims that cherries were insufficient. Though this is a precise resolution, it's hardly fair to let the seller 100% benefit from his mistake while the buyer bears the full costs.)

Here's an interesting thought experiment: Say in that discussion, Patrick was asked this question: "Say it turns out that despite your best efforts, lots of people are borrowing from you to invest in Pirate. And say Pirate stops making payments and many of your loans go bad all at the same time. You probably can't enforce them in any court of law, so your chances of collecting on many of those loans would be low to non-existent. If that happens, are you and your wife going to make personal financial sacrifices to pay back all your investors 100%? This is a serious question and if this happens, I plan to hold you to what you say now and make it a term of our agreement. What will you do?"

What do you honestly think his answer would have been?

Of course, but that's not even remotely analogous because there's no agreement between the two drivers.

Let me try it one more time: Say two people each, through equal fault, believe there's 1,500 pounds of cherries in a truck. They each have no doubt this is true, even though there is actually 1,200 pounds of cherries in the truck. In this context, there is no difference to them between "the cherries in the truck" and "the 1,500 pounds of cherries in the truck", because they both believe there are 1,500 pounds of cherries in the truck. Now, say one agrees to sell the [1,500 pounds of] cherries in the truck to the other for $3,000. Then, they discover there isn't really 1,500 pounds of cherries in the truck. What do you do?

One can argue that the contract said $3,000 for the cherries in the truck, so he's still owed $3,000. The other can argue that there should be 1,500 pounds of cherries in the truck, as agreed, as the other guy should add cherries to the truck.

This is a case of common mistake -- a contract premised on a shared mistaken belief without which neither party would have entered into the agreement and which is central to the agreement. In this case, you can't enforce the contract as agreed because the contract "as agreed" requires there to be 1,500 pounds of cherries in the truck.

This contract was about Patrick's loan portfolio and the characteristics of that portfolio were central to the contract. We now know that this portfolio did not exist in the form the parties believed it did. It's just like the truck not having 1,500 pounds of cherries in it.

Both parties believed Patrick's loan portfolio was largely free of Pirate exposure and free of correlated risk. The parties entered into an agreement premised on that mistaken belief without which neither of them would have entered into the agreement. The contract simply could not have said what should happen if it turns out there's significant correlated risk because neither party believed that was possible.

Here it is as plain as day, mistaken assessment and agreement with that mistaken assessment:

Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you

This is, of course, invalid reasoning. There's indirect Pirate risk even if funds are not invested in BS&T. This is a mistake both parties equally made. Note that they never went on to discuss what would happen in case they were both incorrect and that somehow a Pirate default did cause his equity to drop too low to cover the loans. They wouldn't have because neither thought this would happen. And this wasn't due to fraud or deceit, both parties were simply mistaken.

Not precisely. It's just as much the depositor's fault because they drew substantially the same conclusion with substantially the same information.

If the circumstances were analogous, the result would be analogous. If the circumstances were not analogous, the result would not be analogous. To make this more analogous, those loaning the money would have to agree that the mining farm would produce enough revenue to pay back the loan and agree to the loan only because they agree with that assessment. And you'd need the fault in the erroneous assessment to be evenly split between the parties. In that case, as in this case, the lender's incorrect assessment harmed the borrower just as much as the borrower's incorrect assessment harmed the lender.

It wasn't a co-venture. It should not be considered as a co-venture. It was, however, a contract based on a common mistake.

I agree that that's the first step. But then the next step is to look at whose fault the loss was. To be ridiculous, if the investors loaned money to build a factory and then burned down that factory, clearly the damages from burning down the factory would offset the repayment of the loan. In this case, there is some fault on the part of the investors that offsets the repayment because it harmed the borrower. (These are actually two slightly different ways to look at the same thing. You can view common mistake as akin to shared fault, but conceptually it's a bit different.)

I agree, but that's irrelevant. I'm not arguing that the contract was a co-venture or investment. I'm arguing that the contract was premised on a common mistake.

I am not arguing that the terms of the contract specified a share of the losses. I'm arguing that the losses occurred because of a mistake and the harm from that mistake should be born by those who made the mistake and caused the harm.

I did. I argued that this case is different because both Patrick and those who invested with him made precisely the same mistake.

This is not a case of a bank making bad investments while its depositors had a reasonable expectation that it would make good investments. This is a case where both Patrick and those who invested with him made precisely the same mistake -- given his business model, there's nothing Patrick did wrong (until the Kraken fiasco). He just picked a lousy business model to invest in, just as his investors did. I don't know what else I can say other than to keep repeating myself because these are points I've already responded to. (You are, of course, welcome to respond to my responses.)

Patrick and those who lent money to him belived that Patrick would have sufficient funds in his loan portfolio to cover deposits in the event of a Pirate default. But he did not. This was not through any particular fault of Patrick's that wasn't shared with those who loaned him money.

Aug 10 08:06:31 <mircea_popescu>   listen i actually wanted to talk to you.
Aug 10 08:06:38 <patrickharnett>   hi
Aug 10 08:06:54 <mircea_popescu>   hey. your deposits still bs&t free ?
Aug 10 08:07:21 <patrickharnett>   I run a slightly complicated business, but most of the deposit accounts I run are BS&T free
Aug 10 08:07:39 <patrickharnett>   that's what the market wanted
Aug 10 08:07:58 <mircea_popescu>   you deem yourself able to repay your depositors in the event bs&t goes bankrupt, and nothing is recovered ?
Aug 10 08:08:00 <patrickharnett>   back in a couple of minutes - grabbing a glass of wine - friday evening here
Aug 10 08:09:57 <patrickharnett>   back
Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T
Aug 10 08:10:56 <mircea_popescu>   well that works. i'd like to put 500 bitcoins with you

Patrick is arguing that because of his business model, he would have sufficient assets to cover his borrowed funds even if Pirate defaults. Those who loaned him money agreed with this assessment. Whether it was inevitable given his business model or Patrick just suffered bad luck or what have you, Patrick and those who loaned him money agreed on a set of circumstances which formed the basis for the loan, a key one of which happened to be incorrect, without which neither party would have entered into the agreement.

I don't know how it could be clearer: "well that works. i'd like to put 500 bitcoins with you".

The point is that it was no secret what Patrick was doing or how he believed he was protecting himself from Pirate exposure. There's no evidence that Patrick didn't do what he said he was doing or that there was anything he could have or should have done differently (other than changing his business model). Whatever you believe is the reason he actually did have huge Pirate exposure, there's nothing to suggest that Patrick is any more at fault for that than those who loaned money to him -- they also had unexpected indirect Pirate exposure just like Patrick did. Both Patrick and his investors made precisely the same mistake and caused precisely the same harm in precisely the same way.

(Note that the above does *not* apply to Kraken or any funds taken after Pirate was in default.)
That's not true. Patrick's business model and practices were not secret, and there's no evidence whatsoever (and it totally defies common sense) to argue that what Patrick was doing was basically sound and Patrick just didn't quite say the right magic words or wave the right magic wand. That's just absurd. This is why I believe this kind of reasoning is an attempt to actively refuse to learn anything from this fiasco.

I think the Kraken fund would likely be a slam dunk case for a scammer tag. Even if he is making good faith efforts to repay that debt, he *started* that fund after Pirate was already in default and he fully knew that there was a good possibility Pirate would never repay a single Bitcoin. Nevertheless, he clearly personally guaranteed that principal. Even if he still personally believed that Pirate would pay back all or some of the money he owed "soon", I'm not at all convinced his investors shared that belief. It was specifically his guarantee that induced that investment. The only blame you can place on the investors is for foolishly believing Patrick's personal guarantee. And, of course, "You shouldn't have believed me" is not even a partial defense even if "You made the same mistake I did" is.

It seems I disagree somewhat with what's happening here. I think it's entirely fair to give people a "scammer" tag even if they're making good faith efforts to repay a debt. And I think it's quite likely that Patrick deserves one simply because even if you split the losses with his investors and give him a few years to pay, he still hasn't acknowledged the validity of the debt, committed to some reasonable schedule of payments, or actually made reasonable payments. Even if he's broke through no fault of his own, if he can't pay for his share of the damage he did, IMO he deserves a scammer tag. (Not because he's a scammer, but because he incurred obligations he couldn't even come close to satisfying, even after giving him every imaginable consideration.)

I'm pretty sure you're trolling now. You have exhausted my ability to presume good faith. I give up on trying to reason with you.

In all the years I've been posting on Internet forums and blogs, only two people have ever exhausted my presumption of good faith. So congratulations.

That claim was based on his false belief that his business model was fundamentally sound and that he was diversified against Pirate exposure. It's certainly enforceable against those who have no culpability in that mistake. But it's not fully enforceable against people who shared that mistaken belief and jointly acted to cause the harm. Both Patrick and his investors made the same mistake and it caused precisely the same loss in precisely the same way.

To give a somewhat silly analogy, say some people believe that if you give money to the poor, God will repay you tenfold. If someone borrows money to give to the poor expecting to pay it back from God's bounty, they are totally stuck if the bounty fails to materialize. It's all on them. But if they jointly develop a loan scheme with someone else who shares this belief, and borrow from them in the mutual expectation that the bounty will materialize, it would clearly be inequitable to hold the borrower 100% responsible for the amount borrowed because the mistaken belief that caused the loss was shared by both sides equally. This is so even if one person says, "I'm sure I can pay you back from my money", so long as that assurance flows directly from the shared, mistaken belief.

That's precisely what happened here. Both sides were equally culpable in their mistaken belief that Patrick's business model was sound and that his loan portfolio was largely free of correlated risk. Everything they said to each other reinforced and flowed from that shared mistake belief. The damages flowed directly from that mistaken belief.

Yes. They would form your tax basis. (Assuming you didn't already deduct them as business expenses or hobby losses of course.)

I explained where the 40% and 50% come from at least twice now. As for "values coming out of Patrick", I don't know what you're talking about. If Patrick is attempting to copy my argument, it's not because I've asked him to or he's asked me to.

I have never accepted money from anyone to express an opinion of any kind. (Though not for lack of trying. If you want to pay me to shill, I'll take your money. I just won't lie and say I didn't.)

I dislike Patrick. I've never coordinated any activity with him nor, at least as far as I can recall right now, have I ever had any communication with him (or, so far as I know, anyone connected with him) whatsoever other than public posts to this forum. (Other than one private forum message to, I think, ripper234, in which I advised him that I thought Patrick's business was likely a scam.)

There is absolutely no possible reason I would lie or be dishonest about this. Patrick will likely get a scammer tag anyway, and this has no effect on any actual court of law. The only difference is that I put some blame on you. It's hard to imagine anyone would pay me to do that.

In context, I don't think it was possible to understand what he said that way. This was preceded by:

Aug 10 08:07:21 <patrickharnett>   I run a slightly complicated business, but most of the deposit accounts I run are BS&T free

I think both sides clearly understood that Patrick's "deposit accounts" were in fact loans. If there was any confusion about that, that would be a separate issue.

In fact, I can't see how that could be misunderstood. If he had 10,000 BTC on deposit, he would have 10,000 BTC sitting around, but he'd also owe 10,000 BTC. So how would that help cover a default? He has to have been referring to his loan portfolio. (If he had said it was a "reserve", you'd have a point.)

Right, but we can't do that without figuring out how to handle a case their contract didn't cover. When we do that, it makes a difference how you apportion fault on the two sides.

For example, say you represented that there were 1,500 pounds of cherries on a truck and I bought it from you for $3,000. If I don't pay you the money, and there weren't actually 1,500 pounds of cherries on the truck, we can't just conclude that I owe you the $3,000 the contract specified because you didn't provide me the 1,500 pounds of cherries the contract specified.

Now, saw we both determined there were 1,500 pounds of cherries on the truck and we were both wrong. It's still inequitable to make me pay you the entire $3,000, making me suffer all the losses that flowed from a common mistake, when the fault was both of ours equally. We have to adjust the amount owed based on things like the relative fault. (But not just the relative fault. As I argued elsewhere, it's complicated.)

We can't assess whether Patrick is in default unless we asses how much he should pay. And we can't do that until we apportion fault among the parties. (However, as I've also argued elsewhere, we may be able to skip this process if we can agree on an amount so low it's obviously fair to make Patrick pay at least that and then show he hasn't even paid that amount. I've suggested 40% over three years as this amount.)

That's correct. But that's because a case where the losses are equally the fault of the bank and those who loaned the bank money are rare. However, if you imagine such a case, it should seem clear they should split the losses.

As a silly example, suppose I tell you that I feel really lucky on the slots today and that if you give me $50, I believe I'll win $100 and split the profits with you. Say you also believe that this is the case and therefore loan me the money, fully believing that I will win $100 and split the profits with you. In this case, if I lose the $50, it's not fair for me to be responsible to you for the entire $50, lost profits, and so on. When you have a common mistake, made equally by both parties, with no significantly greater fault falling on either party, it is inequitable to try to enforce the contract as agreed. In our gambling case, our contract never addresses the case where I lose money because neither of us considered it possible -- it can't say what should happen in that case because neither of us ever tried to make it do so.

The issue in this case is that both Patrick and those who loaned him money made precisely the same mistake, and neither party would have entered into the agreement but for that mistake.

I agree. Patrick was mistaken and should be held accountable for that mistake:

Aug 10 08:07:58 <mircea_popescu>   you deem yourself able to repay your depositors in the event bs&t goes bankrupt, and nothing is recovered ?
Aug 10 08:10:17 <patrickharnett>   in the event BS&T goes bust, I have more than enough assets to cover that
Aug 10 08:10:41 <patrickharnett>   mainly because the 15,500 coins I hold on deposit are not invest in BS&T

There's no evidence this was a lie or misrepresentation. It was simply something that he was incorrect about. Where I disagree with some others in this thread is that I believe the people who loaned Patrick money made precisely the same mistake and are likewise accountable for the harm that mistake caused. Patrick believed he was sufficiently free of Pirate exposure and correlated risk that he would have sufficient loan assets to make repayments if Pirate defaulted. He was wrong. But this was not because of secret knowledge only he had, it was because he thought his basic business model (which was not a secret) was sound when it wasn't.

If people are not held accountable for bad decisions and poor judgment that causes harm, we're doomed to repeat Pirate, Patrick, and Hashking over and over again. Those who invested paid folks like Pirate to run their scams and knew, or should have known, that they were paying people to make them the recipients of fraudulent transfers. Patrick was an un-knowing Pirate intermediary and is, in my opinion, much less culpable than the knowing Pirate intermediaries such as PPT operators. Those who loaned him money were equally un-knowing Pirate intermediaries.

Three wildcards that can mess up the math are:

1) The reward drop might affect the exchange rate.

2) The reward drop might cause some existing miners to stop mining.

3) The difficulty increase may cause some existing miners to stop mining.

Personally, I don't think these three factors will be all that significant, so I think your reasoning is about as good a prediction as it is possible to make.

The integrity that comes from taking responsibility for your own bad judgment and admitting when you are in the wrong rather than hurling insults and accusations at the people who try to point it out to you. The integrity that comes from taking an unpopular position because you believe it is correct and because you believe it is what the community needs to hear.

I believe that in the United States, at least, you don't have to. You should be able to defer any taxable income until you sell or otherwise dispose of the coins. The cost of your mining, assuming you can't tax deduct it, should form your tax basis in the coins. You should be able to treat it as either a business if it meets the criteria for a business, otherwise, mining costs should count as hobby losses and bitcoin sales revenue as hobby profits.

Do these really treat things purchased to consume the same as things purchased as an investment that will be held unmodified and later resold? And is there really no distinction between Bitcoins that are mined (roughly equivalent to making something yourself, I would think) and things that are purchased at market value?

They're not mutually exclusive. And I don't think anyone believes that you can't hold someone responsible for believing a false claim and acting on it.


What?! If the loss of their coins is just compensation for the harm their mistake did, then Patrick wouldn't owe anyone anything and this thread would have no point. The point of this thread is to resolve the claim that Patrick owes his investors money.

Yes, they do, because their stupid decision harmed others.

The idea that Patrick was the leader and his investors mere followers is just comical. That's simply not how it happened.

No, not true at all. If I ever suggested that, it was unintentional.

Ahh, so you do wish to excuse those who are equally culpable. That's too bad. Because Patricks and Hashkings and Pirates will always come along and if we don't hold the other people accountable for making precisely the same mistake with precisely the same consequences, we'll repeat this fiasco again and again.

But don't say that I'm trying to excuse people. I'm trying to hold *more* people accountable than you are.

Absolutely. And I do fault Patrick for making impossible claims.

There's no evidence Patrick lied about anything having to do with this arrangement. And I agree, he bears the responsibility for the false statements he made.

Yes, and I do. However, I place roughly equal blame on those who believed that what Patrick was claiming was possible. It is substantially the same mistake. There's no significant information that Patrick had that those who invested with him didn't have that had any relevance to the question of whether his basic business model was sensible.

Those who invested with Patrick made precisely the same fundamental mistake Patrick made, in precisely the same way, causing precisely the same harm. I want to hold them responsible too. You seem to think I'm trying to excuse some fault on Patrick's part. Absolutely not -- I do not excuse anyone who believed that Patrick's business model was sound and risked people's money on that basis.