Bitcoin Pawn?

[Equiquay]

Hey All,

Longtime lurker here... I registered to ask this question:

Is there anyone out there who offers a true bitcoin pawn service?  By that, I mean, a place where someone can pawn their bitcoin?

I don't want to liquidate my bitcoin, but I'm in need of some capital in the meantime.

Thought something like this might work:

1.  I sell my bitcoin to someone for a cheap price (say, $5 per bitcoin).
2.  At some point in the future, maybe a year or two from now, I buy my bitcoin back for a cheap price (say, $6 per bitcoin).

Risk is minimized to lender because he's holding my BTC as collateral, and it's unlikely that bitcoin will drop lower than the price he paid.

All the details could be worked out.  I just want to know if someone actually offers this service.

Is there another option open to me?  Or, can you think of any way to protect both parties, so that no one can cheat or steal?

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[QuantumKiwi]

Essentially there is no way to protect anyone due to the anonymous type of medium that bitcoin is.

Using a well established company which has a strong legal backing in behind it with trust accounts will assist.

[DannyHamilton]

. . .I don't want to liquidate my bitcoin, but I'm in need of some capital in the meantime. . .

How much capital are you trying to raise, and how soon do you need it?  I might be interested in performing this service for you.  I'll have to think about it a bit.

[Equiquay]

Hi, DannyHamilton.  I'm not in a rush, and my primary concern right now is working out a way to complete such a transaction without being ripped off.  I was thinking of something in the range of 1500 BTC.

If I sell my bitcoin to someone for $5, what guarantee do I have that they will honor their agreement?  Unlike other loans around this forum, it's the lender and not the borrower who needs to demonstrate reliability.

I'd only consider doing this if I found an honorable individual or company who specializes in transactions like this.

[Phinnaeus Gage]

You are aware that the first thing one would ask of you is to see the wallet to make sure the coins are not tainted, aren't you?

[Stephen Gornick]

Is there anyone out there who offers a true bitcoin pawn service?  By that, I mean, a place where someone can pawn their bitcoin?

Well, one way to do it is to find someone willing to sell you a CALL option and then sell your coins today at market value to meet your immediate cash needs.

There is an options market (MPOE) but only for current month and next-month, and there are significant premiums paid for this.

Another approach is to sell half of your coins (750 BTC of the 1,500 BTC) for about $9,000 USD and that gives you the cash you wanted now.  Then you send maybe half of what is left (e.g. 375 BTC) to ICBIT.se and buy 750 BTC of BUZ2 futures contracts.

Then if the exchange rate increases in three months, you realize the increase from the gains on a total of 1,500 BTC -- the same just as if you had never sold any to begin with.  This gain comes from the 375 BTC you still hold in your own wallet, plus the 375 you sent to ICBIT plus the gain on the 750 BUZ2 contracts (which is paid daily as "margin variance").   This is using 1:2 leverage at ICBIT.  You can leverage up to 1:10, but the higher the leverage the higher the risk of seeing forced liquidation.

There are some assumptions like the how gains or losses in BUZ2 show follow closely the gains or losses in the BTC/USD, but that isn't guaranteed.   There can be big differences,  as at one point in time BUZ2 was trading over $14 with BTC/USD in the $12s, and also recently BUZ2 was trading under $10 when BTC/USD was just under $12.   So if you are forced to sell BUZ2 before settlement (the end of the BUZ2 contract) you may end up taking a loss on the difference between where the future is trading versus the spot market rate.

There's also counterparty risk.  ICBIT.se offers futures contracts which is a regulated activity in most areas but this service is operating anonymously.  If tomorrow they disappear, or perhaps they "get hacked", there's likely no recourse.  Your 375 BTC would likely then be gone as well as any gains that might have accumulated.

But in comparison, that loss would be lower than giving 1,500 BTC as collateral on a $7,500 loan and then your lender disappears (because with the ICBIT method, you still keep 375 BTC in your own wallet plus the $9,000 from selling the 750 BTC initially).   If you are willing to gamble that the exchange rate will be going up, you could even send fewer BTCs to ICBIT and do a higher leverage. Depositing 150 BTC and levering up just under 4:1 lets you buy those 750 BUZ2, but levered that much puts you at risk of having your position being force liquidated if the exchange rate were to drop roughly near 15% (to under $11, for example).

But that's an option you might not be familiar with but might find useful so I wanted to share that here.

[Equiquay]

Phinnaeus, I guess I've been out of the loop too long: not sure what you mean by tainted.  They're coins that I either mined myself or purchased on MtGox last year.  Right now I have them stored in paper wallets.  I'll do some research.

Stephen, I certainly wasn't aware of that option.  In fact, I only followed about half of what you said, but it at least gives me a place to start looking.  Thanks for your response.

[Stephen Gornick]

In fact, I only followed about half of what you said,

Heh, sorry.

Financial derivatives like options contracts and futures contracts are tools where taking a higher risk can provide higher returns.    In this instance, I'm suggesting a method where you can put at risk a fraction of your coins into a bet to obtain the same benefit as if you were to put all your coins up and get a loan.   Except this tactic only works if the exchange rate doesn't drop much (e.g. doesn't drop by more than 10 or 15%).

If instead it drops more than that, you actually can come out ahead by obtaining a loan of USDs where you had put up your BTCs as collateral.   I just don't know how likely you are to find such a loan (at least, not for borrowing such a large amount.)

[mjc]

There is risk to the buyer in this case.  What happens if the BTC drops below $5 and you decide it is not worth buying them back?

[firefop]

There is risk to the buyer in this case.  What happens if the BTC drops below $5 and you decide it is not worth buying them back?

I'd play buyer in this scenario - but I'd insist on a set term, where after if they aren't repurchased they belong to me.

[mjc]

You should also add if they drop below a certain value he has N days to settle or they become yours.  that certain value should be high enough to allow you to get out if they fall below $5.  I'd use something like $8.

Sounds fair to me.  Actually, sounds like a coo new service.

[Stephen Gornick]

Actually, sounds like a coo new service.

It has been on a drawing board at least twice that I know of.  Here's one of them:
 - http://ringcoin.com/#PawnCoin


A pawn shop might offer to loan an amount maybe 75% of the value of the collateral, but that is for items that can sell -- like jewelry or tools.   Also, if there is volatility, like Bitcoin is exposed to, the amount of the loan might need to be even less to accommodate for a price move that is unfavorable to the pawn broker / lender.

So to get a $1K USD loan, maybe 1.5K USD of bitcoin, bitcoin might need to be put up for collateral.

So that is to protect the pawnbroker (lender) from a loss from having to sell the collateral if loan repayment doesn't occur.

But what amount would you expect to pay as interest plus fees on the loan?  

Pawn shops in the U.S. have limits often from state law based on user or other lending restrictions.  I don't know about an pawnshop lending interest rates, but a payday lender's rate might be 400% APR.

There are 25,000 payday lenders in U.S. These types of loans typically cost 400 percent annual interest (APR) or more, and the finance charges range from $15 to $30 on a $100 loan, according to the Consumer Federation of America.

- http://www.americanbanker.com/issues/177_223/zestfinance-aims-to-fix-underwriting-for-the-underbanked-1054464-1.html

I'm incredulous at their assertion ...

A $500 loan made through ZestFinance's platform would cost the borrower $400 in interest and fees. A comparable payday loan would rack up $900 in costs, Merrill says.

Of course, a variant using bitcoins as collateral would allow the loan origination, production and servicing to all be done online and should cost much, much less.  I could see a $1,000 loan with $1,500 worth of collateral incurring fees of about $50 a month in interest and like $25 in fees per-loan.

[firefop]

Of course, a variant using bitcoins as collateral would allow the loan origination, production and servicing to all be done online and should cost much, much less.  I could see a $1,000 loan with $1,500 worth of collateral incurring fees of about $50 a month in interest and like $25 in fees per-loan.

I don't see any need for interest in this scenario. There should be a fee, based on the term of before they must be repurchased - this should be paid up front imo.

Say... 0.09% weekly. Just shy of 5% for a year term. And they're collateralized at 150% to begin with. In the best case, the lender takes as short a term as possible - making nearly 5% a year on his investment with almost zero risk - - - on the other extreme someone loans out, never repurchases and the lender keeps the btc + the fee which has already been paid.

Shorten the term to reduce risk.