High-interest, low-risk 'investments' are like perpetual motion machines

[Gavin Andresen]

I was sent a personal message by somebody saying that the burden of proof that something is a scam should be on the person accusing the scammer.  If they can't PROVE it, then they should shut up.

I disagree. I think the burden of proof is on people "guaranteeing" high returns.

Here's how I think of it:

Imagine you see somebody claiming they have invented a perpetual motion machine.

You claim bullshit, because that's against the laws of physics and all previous experience.

Now they send you an email, saying "... before making such accusations you need to PROVE that it cannot work."

Foolproof schemes to make high interest at low risk are the financial world's perpetual motion machines. They do not exist.

Perpetual motion machines may not be scams; there are misguided people who really do believe that they've violated the laws of physics and will prove all of those pesky scientists wrong. I'm sure there are people who truly believe that they've invented foolproof methods of investing lots of money with no risk, too, but I'm equally sure they're delusional.

[moni3z]

You could tag every ponzi/HYIP with "Warning this is a scam" but suckers will still invest because they believe they can game it and get out before everything goes to hell. Everybody admitted they knew Madoff was running a ponzi yet they still gave him billions.

[paraipan]

...

It also makes it very hard to croudfund real projects, as people prefer to go after these larger returns, even in the face of ridiculous risk.

^this, I would really like other people to see the potential of a project when presented to them, and not go looking for extremely high returns and more higher risks

[Bitcoin Oz]

Bitcoin itself grew by 3000% at one time and I think that's partly to blame for the high risk high reward mindset of the bitcoin community now. The best advice is never invest more than you can afford to lose and a lot of the "investment" schemes belong in the gambling section.

I think some of the loan sharks are legitimate when they give deposit returns of 1-2% simply because they charge so much for the risk of bitcoin loans and share this profit margin. I believe these returns will normalise and are beginning to drop as the market starts to mature.

[nimda]

I think some of the loan sharks are legitimate when they give deposit returns of 1-2% simply because they charge so much for the risk of bitcoin loans and share this profit margin. I believe these returns will normalise and are beginning to drop as the market starts to mature.

Absolutely. The market is maturing. Slow it is, but we had to have our ponzi eventually. Furthermore, I think some lenders have proved it (at least the one(s) with open books).

Mining is still profitable, if done correctly. Also, there are people willing to borrow in bitcoins using one-time, short, high-interest loans; a "loan shark" can borrow at lower rates then loan out to these people.

If their books are closed, though, then they still have the burden of proof. Pirate had the burden of proof.

[Shadow383]

I was sent a personal message by somebody saying that the burden of proof that something is a scam should be on the person accusing the scammer.  If they can't PROVE it, then they should shut up.

I disagree. I think the burden of proof is on people "guaranteeing" high returns.

Here's how I think of it:

Imagine you see somebody claiming they have invented a perpetual motion machine.

You claim bullshit, because that's against the laws of physics and all previous experience.

Now they send you an email, saying "... before making such accusations you need to PROVE that it cannot work."

Foolproof schemes to make high interest at low risk are the financial world's perpetual motion machines. They do not exist.

Perpetual motion machines may not be scams; there are misguided people who really do believe that they've violated the laws of physics and will prove all of those pesky scientists wrong. I'm sure there are people who truly believe that they've invented foolproof methods of investing lots of money with no risk, too, but I'm equally sure they're delusional.

Well then given that you're an admin here, can't we move some of these schemes to "gambling" or to an HYIP board?

[squall1066]

I was going to say something but changed my mind.

[Meni Rosenfeld]

I agree with the general idea that people shouldn't be automatically assumed to be trustworthy, but there's something very fundamental you seem to be missing, and I'm happy for the opportunity to point it out.

Foolproof schemes to make high interest at low risk are the financial world's perpetual motion machines. They do not exist.

Perpetual motion machines may not be scams; there are misguided people who really do believe that they've violated the laws of physics and will prove all of those pesky scientists wrong. I'm sure there are people who truly believe that they've invented foolproof methods of investing lots of money with no risk, too, but I'm equally sure they're delusional.

If someone is taking deposits and offering high interest with low risk, it does not mean he thinks whatever he is doing with the money is low-risk. It means he is willing to absorb the risk, and commit his personal illiquid assets to pay it back if the risk doesn't pan out.

Let's take a simple example. Someone is very sure that the BTC price is going to increase and wants to buy $10K worth of bitcoins. But he doesn't have $10K and can't borrow it with traditional means. He does have a $20K car which he'd like to keep if possible (and which the bank won't accept as collateral), but he can trade it for a $10K car should the worst happen. He expects to sufficiently profit from buying to be willing to borrow at high interest; and he commits to repay by trading his car if he loses.

This whole arrangement is very risky for the borrower (whether he realizes it or not); but if the borrower is trustworthy, it is not risky for the lender.

In practice there are multiple ways to generate high ROI with various risk levels, such as currency speculation, arbitrage, mining, starting new businesses in the emerging Bitcoin economy, short-term loans, or investing with other people who are better equipped to generate ROI than you. By diversifying among various channels the overall risk can be lowered even if every single investment is risky; and by having valuable traditional illiquid assets there is a way to honor one's obligations even if the risk assessments went horribly wrong. In this case a smart investor can profit by accepting high-interest loans with no risk for the lender.

I'd like to especially point out short-term loans as one of the primary revenue streams of some of the big borrowers; many people are willing to pay high interest for such loans. I don't know why they are, but the fact of the matter is that they are. Once again it is the borrower's role to assess and absorb the (relatively high) default risk of these individual loans. This isn't new with Bitcoin, also; p2p loans with 1% daily interest have existed for a while in the traditional economy.

To summarize, I'm not saying any particular borrower is or is not a scammer. I'm saying that given the diversity of investment opportunities, there is nothing fundamentally impossible about high-interest loans with no risk for the lender. The only catch is finding a borrower who can be trusted to be both honest and responsible with his liabilities; and of course, by the time it becomes easy to find one, the supply of time-money will be high enough that his offered rates will not be as high.

[P4man]

I was sent a personal message by somebody saying that the burden of proof that something is a scam should be on the person accusing the scammer.  If they can't PROVE it, then they should shut up.

I disagree. I think the burden of proof is on people "guaranteeing" high returns.

Precisely.  This is so obvious it shouldnt even have to be posted (let alone quoted and acknowledged).

As I posted elsewhere, saying something is a ponzi is the same as saying there is no profit generation. You cant prove a negative, its up to the person accepting deposits to prove its not a scam or ponzi. If such proof is not presented, it should be assumed a ponzi/scam.

Thats why i think Patrick Harnetts ratings are so dangerous. He is assuming the information fed to him is correct, and bases his ratings on that, best I can tell, without checking any cold hard facts, like wallet addresses, GLSBE holdings, bank statements or anything. In effect he is just legitimizing any scammer thats making false claims by rating the lies instead of the facts.

[n8rwJeTt8TrrLKPa55eU]

Thats why i think Patrick Harnetts ratings are so dangerous. He is assuming the information fed to him is correct, and bases his ratings on that, best I can tell, without checking any cold hard facts, like wallet addresses, GLSBE holdings, bank statements or anything. In effect he is just legitimizing any scammer thats making false claims by rating the lies instead of the facts.

Yep.  Enron and Bre-X showed that not only should you absolutely not trust what an entity tells you about itself...but you probably should not blindly trust its auditors, either.

[Mosrite]

I agree with the general idea that people shouldn't be automatically assumed to be trustworthy, but there's something very fundamental you seem to be missing, and I'm happy for the opportunity to point it out.

Foolproof schemes to make high interest at low risk are the financial world's perpetual motion machines. They do not exist.

Perpetual motion machines may not be scams; there are misguided people who really do believe that they've violated the laws of physics and will prove all of those pesky scientists wrong. I'm sure there are people who truly believe that they've invented foolproof methods of investing lots of money with no risk, too, but I'm equally sure they're delusional.

If someone is taking deposits and offering high interest with low risk, it does not mean he thinks whatever he is doing with the money is low-risk. It means he is willing to absorb the risk, and commit his personal illiquid assets to pay it back if the risk doesn't pan out.

Let's take a simple example. Someone is very sure that the BTC price is going to increase and wants to buy $10K worth of bitcoins. But he doesn't have $10K and can't borrow it with traditional means. He does have a $20K car which he'd like to keep if possible (and which the bank won't accept as collateral), but he can trade it for a $10K car should the worst happen. He expects to sufficiently profit from buying to be willing to borrow at high interest; and he commits to repay by trading his car if he loses.

This whole arrangement is very risky for the borrower (whether he realizes it or not); but if the borrower is trustworthy, it is not risky for the lender.

In practice there are multiple ways to generate high ROI with various risk levels, such as currency speculation, arbitrage, mining, starting new businesses in the emerging Bitcoin economy, short-term loans, or investing with other people who are better equipped to generate ROI than you. By diversifying among various channels the overall risk can be lowered even if every single investment is risky; and by having valuable traditional illiquid assets there is a way to honor one's obligations even if the risk assessments went horribly wrong. In this case a smart investor can profit by accepting high-interest loans with no risk for the lender.

I'd like to especially point out short-term loans as one of the primary revenue streams of some of the big depositors; many people are willing to pay high interest for such loans. I don't know why they are, but the fact of the matter is that they are. Once again it is the depositor's role to assess and absorb the (relatively high) default risk of these individual loans. This isn't new with Bitcoin, also; p2p loans with 1% daily interest have existed for a while in the traditional economy.

To summarize, I'm not saying any particular depositor is or is not a scammer. I'm saying that given the diversity of investment opportunities, there is nothing fundamentally impossible about high-interest loans with no risk for the lender. The only catch is finding a depositor who can be trusted to be both honest and responsible with his liabilities; and of course, by the time it becomes easy to find one, the supply of time-money will be high enough that his offered rates will not be as high.

Can you point out one example of this ever happening in the real world?

[Jutarul]

Whatever the ROI is - the most important point is plausibility.

The issuer of a security clearly has to explain HOW the ROI is achieved, enabling the investor to use their brains. Also the issuer should provide at least a basic risk assessment, doesn't have to be complete.

An investment opportunity with a fuzzy explanation like: "will invest in profitable businesses" ...
no - that don't impress me much.

[Meni Rosenfeld]

Can you point out one example of this ever happening in the real world?

Not sure what you mean by "this", but http://www.paydayninja.net/ and http://shorttermloans.net/ offer short-term loans at 25%/mo (and if they still offer it, someone must be taking it), and successful startups commonly give massive returns to early investors. Before Bitcoin there was no easy way to move money around for investments and deposits, which may have been a catalyst for the current lending marketplace.

The borrowers could be wrong and the underlying investment opportunities may not actually be as profitable as they think. But as long as the borrower is honest and responsible, this is the borrower's problem, not the lender's.

[tucenaber]

The depositors could be wrong and the underlying investment opportunities may not actually be as profitable as they think. But as long as the depositor is honest and responsible, this is the depositor's problem, not the lender's.

You are confusing the terms. When you use the term depositor you are confusing the lender with the borrower. Call it borrower and lender instead, that will make it easier for you.

The term depositor is in fact misleading since these schemes are not banks, the few that are not ponzi schemes are lending "institutions" or middle men. Some of them might want to pretend they are (fractional reserve) banks but they are in fact not. A bank's primary function is to keep the clients' money safe against theft and at the same time have the money immediately avaiable on request. Nobody can say that about any of these businesses, and the bitcoin world has little use for banks.

de·pos·it [dih-poz-it]
verb (used with object)
1. to place for safekeeping or in trust, especially in a bank account: He deposited his paycheck every Friday.

By using the word deposit you help them convince people that the risk is low when in fact the risk is very high.

[Meni Rosenfeld]

The depositors could be wrong and the underlying investment opportunities may not actually be as profitable as they think. But as long as the depositor is honest and responsible, this is the depositor's problem, not the lender's.

You are confusing the terms. When you use the term depositor you are confusing the lender with the borrower. Call it borrower and lender instead, that will make it easier for you.

The term depositor is in fact misleading since these schemes are not banks, the few that are not ponzi schemes are lending "institutions" or middle men. Some of them might want to pretend they are (fractional reserve) banks but they are in fact not. A bank's primary function is to keep the clients' money safe against theft and at the same time have the money immediately avaiable on request. Nobody can say that about any of these businesses, and the bitcoin world has little use for banks.

de·pos·it [dih-poz-it]
verb (used with object)
1. to place for safekeeping or in trust, especially in a bank account: He deposited his paycheck every Friday.

By using the word deposit you help them convince people that the risk is low when in fact the risk is very high.

I can see how I may have used "depositor" to refer to the wrong person, I've edited to "borrower". Whether the term "deposit" itself is appropriate is arguable.