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Author Topic: Bitcoin, debt as deep as the banks couldn't have imagined.  (Read 5404 times)
kwukduck
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January 16, 2012, 07:01:04 AM
 #1

Unless some legal regulation is set in place, i see this as a disastrous thing to happen with bitcoin: bitcoin banking (loans)

Hey how cool is that! We can lend money without interest! 0%!!

Really?! Assuming the value of btc will steadily grow over time, this gives the incentive and in fact interest, that companies are after.

You may lend 1000 bitcoins right now, at 0% rate. Buy something nice with it, you can pay back in a year. So currently that's worth like 7k USD, nice starter car.

In a year, if nothing bad has happened to bitcoin, you still have to pay back that 1000 bitcoins, but it's value is likely to have doubled (or trippled or.. lots more)
You have to pay back 1000 bitcoins, 14k USD in wealth now! Since there aren't gonna be more bitcoins, your ass is now pwned by company X who gave you the loan.

And ofcourse a 7k loan is really small compared to loans people get these days.

In december 2010 i got 500 btc from a friend to play with (he mined that in like a week), i messed around with them, gave them away, sold @ 1.7 USD.
I don't even want to start thinking of the situation where this was a loan, how the heck am i gonna pay back 500 btc at current value?

People will need to learn how to handle real money again i'm afraid, but before this happens it might be way too late.

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January 16, 2012, 07:41:47 AM
 #2

If you look at actual activity on the lending sub forum you will see what has developed:  very short term loans at very high interest rates.  That is exactly what you would expect.

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January 16, 2012, 07:49:33 AM
 #3

you still have to pay back that 1000 bitcoins, but it's value is likely to have doubled (or trippled or.. lots more)

if you have contracts that pay specific amounts of bitcoins then you aren't exposed to the risk of a rising exchange rate.  we don't have such an economy yet so borrowing (and lending) bitcoins is a risky business.
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January 16, 2012, 08:37:26 AM
 #4

you still have to pay back that 1000 bitcoins, but it's value is likely to have doubled (or trippled or.. lots more)

if you have contracts that pay specific amounts of bitcoins then you aren't exposed to the risk of a rising exchange rate.  we don't have such an economy yet so borrowing (and lending) bitcoins is a risky business.

But the borrower is exposed to the risk.  Seeing as how they are borrowing the money, who do you can think can afford the risk more?  The borrowers will be forced to default when their debt doubles and the lenders will eventually have to have much higher interest rates, or shorter term loans, or go bankrupt.

https://www.bitcoin.org/bitcoin.pdf
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bombartier357
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January 17, 2012, 06:35:38 PM
 #5

Bitcoins are still useful for lending.

I can lend $1000 usd anonymously anywhere in the world and get solid returns.

Bitcoins at this point in time are risky to even own.  They swing wildly from day to day.  I could lend 5btc and in return get 4btc back if btc raises in value.  I still do get a healthy return.
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January 17, 2012, 06:52:31 PM
 #6

Unless some legal regulation is set in place, i see this as a disastrous thing to happen with bitcoin: bitcoin banking (loans)

You may lend 1000 bitcoins right now, at 0% rate. Buy something nice with it, you can pay back in a year. So currently that's worth like 7k USD, nice starter car.

In a year, if nothing bad has happened to bitcoin, you still have to pay back that 1000 bitcoins, but it's value is likely to have doubled (or trippled or.. lots more)
You have to pay back 1000 bitcoins, 14k USD in wealth now! Since there aren't gonna be more bitcoins, your ass is now pwned by company X who gave you the loan.

People will need to learn how to handle real money again i'm afraid, but before this happens it might be way too late.


You would be dumb to accept a loan at 0% rate if the likelihood of the value doubling was high. Why do we need legal regulation to stop people from being dumb?
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January 17, 2012, 11:40:33 PM
 #7

the Islamic bank of bitcoin does it. what's the problem?

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January 18, 2012, 02:46:19 PM
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Problems? Dunno.

What about take the money and run away?
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January 20, 2012, 12:07:06 AM
 #9

In a sense debt is a threat to Bitcoin.

Bitcoin is supposed to be free from the debt system. If it's like gold then you have the value in your hand.

Fiat is debt based in that someone 'promises to pay the bearer'

By lending Bitcoin you are replacing your BTC with a promise to repay. Further, you are probably doing it as % interest, something that is strongly advised against by every religion I can think of, and for good reason:

 if the person runs off with your money, you might want to track them down and make them pay.
That thought of expecting them to pay IS the debt system.

 When you lend or borrow Bitcoin you are undermining it and replacing it with a competing system. In many cases it could be the PGP irc WOB system. That then could lead to corruption in that system. This is the kind of thing you were trying to avoid with Bitcoin.

 By all means lend to people you love and trust. Invest in business to make an impact in the world.

But lending simply for the return without looking at what your money is doing is inadvisable...

 Bitcoin fixes some major shortfalls of money but it's no panacea. There are plenty of other problems and debt is a big one
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January 20, 2012, 04:37:56 PM
 #10

Just as fyi, I was trying to tackle this problem from a financial/lender point of view last summer, trying to figure out how loans and interest can even be calculated in a deflationary economy. The solution we came up with is a formula similar to the current Present Value of Annuity formula (example of it switched to calculate payments here http://www.financeformulas.net/Loan_Payment_Formula.html) that all lenders use to calculate term/interest/payment amounts, though a bit more complex. In summary, instead of you paying the same amount every month as you do with mortgages and car loans now, your payments would be heavily frontloaded, with the first payment being rather large, and each month's consecutive payment decreasing until the final comparably tiny payment. From the perspective of the lender, they get back the same amount of value they would get had they invested the bitcoin at the same interest they lent it out at, plus the deflationary value growth of bitcoin. From the borrower point of view, even though each month's payment is a different number, after bitcoin deflation is taken into account, the actual value of the payment remains the same.
Hope that made sense.

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January 20, 2012, 05:02:14 PM
 #11

You can also denominate the loan in another currency/commodity, using Bitcoin only as the transfer mechanism. Nothing new about Bitcoin causes people to make foolish choices, so I wouldn't call a few people dumb enough to take out huge loans in a volatile commodity "disastrous". Since no court in the world has actually upheld any of these agreements, and many borrowers are anonymous, much of the actual risk is on the lender.

Not to mention the practical difficulties in trying to regulate cryptocurrency.
kwukduck
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January 22, 2012, 07:26:04 AM
 #12

well, the problem isnt bitcoin itsself, its the fact that people got used to and even addicted to getting loans.

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Kluge
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January 22, 2012, 10:12:33 AM
 #13

Bitcoin loans as you describe in the OP are unfeasable and non-existent (AFAIK) because, as others said, Bitcoin exchange rate is waaaaaay too volatile. I've heard it proposed a few times that loans be taken out (even at 10% MPR) as a bet for BTC price inflating. If someone takes out a 100BTC loan for one month, and the price of BTC increases from $1/BTC at date of lending to $10/BTC at date due, the person owes 10BTC more, but has effectively profited $890. This is not too unreasonable a scenario.

As such, there is a much greater risk in lending BTC, which is the exchange rate of BTC fluctuating wildly week-to-week. I can loan 100BTC to someone, and on top of the risk of that person not paying the loan back, there's the additional risk of BTC dropping 40%. At the end of that month, I end up losing 30% of the money I have tied up in loans. Additionally, with money tied up, my ability to react to market shifts is crippled. I could have 200BTC out for 3 months, and in that time, it's not unreasonable for BTC to go from.... Idunno.... $5/BTC to $30/BTC, then down to $12/BTC by the time the loan's up.

The point is: Bitcoin has proven it doesn't steadily increase with time. From mid-June, 2011, it could be much easier said the value of Bitcoin rapidly declines with time.

Another point I'd like to make is that interest isn't necessarily detrimental. When a person or organization is able to increase rate of production to equal demand, the economy becomes more efficient. I admire that people are out there making no-interest loans, and I've pledged to donate a portion of my "profits" to IBB, but without charging interest, there simply wouldn't be enough lenders to maximize market efficiency. I want to see the Bitcoin community grow, I want to see it more production-oriented, and I want to see a greater spread of wealth, which won't happen as quickly if loans aren't out there to be made.

Edit: after doing lending a bit more and learning default rates from other lenders, I'll note my opinion has shifted, both as to the long-term value of BTC, and why interest rates should be so high. When I first started lending, I assumed the high rates were due to the volatility in the USD/BTC exchange rate, but I doubt the validity of that anymore, because most lenders are long-term lenders. They've been here for a good while and show no signs of going away. As such, day-to-day, week-to-week, and even month-to-month fluctuations aren't very relevant, as it's assumed the value of BTC will clumsily increase long-term. According to an established lender I trust, default rates are @ ~10%. I have not done enough loans to have any type of accurate number to give (fwiw, I have not yet experienced a lendee default). MPR on interest rates are... guess! - typically a bit over 10% MPR. Very short-term loans are subject to dramatically higher interest rates because the risk is almost entirely that the lendee defaults and because of the default risk, we still have to check them extremely thoroughly.

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January 22, 2012, 10:28:28 AM
 #14

Its not just loans. Think if your salary was denominated in BTC. You might make $3K the first month and $30K/month.. or $300 a year later. You can see thats just as impossible. As long as btc remains this volatile, it can not be used for things like denominating salaries or non trivial mid or long term loans. And vice versa, as long as bread, oil and salaries are never denominated in BTC, its not going to be stable. Catch 22 which I think btc will never get out of. BUt it doesnt have to, you can denominate loans, salaries and barrels of oil in anything else, and still use BTC to do the transactions.

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January 22, 2012, 12:00:19 PM
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well, the problem isnt bitcoin itsself, its the fact that people got used to and even addicted to getting loans.
^^ This
People that lend money take the risk that the person will not pay it back. If you loan someone $30 and the next day their debt is $300 and they are able to pay it back, then you win.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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January 23, 2012, 03:51:25 PM
 #16

id advice regulation to avoid people running away with a loan.
But if someone works in BTC and needs to buy something and gets a loan @ 0% interest, then its the persons responsibility to repay the loan, it was their choice to get the loan or not as long as the risk are explain clearly then there is no moral issue.

Now if you work to get paid in BTC then getting a 0% interest loan just makes sense. Cause your getting paid in BTC already so you can repay at the currency and invest the loan (someone elses money) into a venture. If it fails the impact of repaying wont be as hard as if it where your own money.

I don't grasp the concept of getting a loan with interest being immoral.
If its against religion, then would reselling a good for gain be immoral also.
Buy a car for 7k and resell for 8k (lol) your gaining 1k... that is a gain, so is that not immoral also?

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January 23, 2012, 04:19:52 PM
 #17

I don't grasp the concept of getting a loan with interest being immoral.
If its against religion, then would reselling a good for gain be immoral also.
Buy a car for 7k and resell for 8k (lol) your gaining 1k... that is a gain, so is that not immoral also?

That's pretty much how they do it there. Charging interest is a sin, so they use the same interest formulas to figure out how much the loan is worth, and charge a one time fee instead. So a $100 10% interest loan just becomes a $100 loan with a $10 fee. Same for houses; instead of giving you a $100,000 %5 loan and collecting $193,000 over the years, they just give you a $100,000 loan and expect you to pay back a loan fee of $93,000, or sell a $100,000 house for $193,000. By calling it a fee instead of interest they get around the issue, with the exact same end result. Religion is funny that way sometimes.

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January 23, 2012, 07:13:34 PM
 #18

Hope this isn't getting too offtopic.

Not particularly religious because I find it often corrupt, but I don't throw the baby out with the bathwater because of that. For me religion is humanities wisdom from thousands of years ago. Why throw it out? Analyse it, see if it makes sense and use it. Don't let current trend encourage you to throw it out like the missionaries did with all that other knowledge we had before. Look at the 12th Planet book. I'm not saying I go in for that theory but it was able to exist because our history wasn't completely erased.

So every religion's got something to say on money.
Here's a starting point on the major ones from a guy who lives without money (I'm not advocating this but I'm open to the idea after reading responses to my thoughts on why surely that can't work if everyone did it):
http://sites.google.com/site/livingwithoutmoney/Home/all-the-world-s-religions-agree-on-this-one-thing
No witch, Satanism, pagism and naturalistic style opinion there but Taoism is there. Some of this stuff is being backed up by science now. Got any references for me?

One thing common to a lot of the religions is usury. Now this is a thing I had no idea existed until I was like in my 20's! What happened there?? Until the catholic church came down everybody was being advised not to lend money and charge interest... what the heck happened? I find it a bit wierd that I was taught about this in school history, or theology and I notice I've never seen it in churches.
On every UK bank note it has "Promise to pay the bearer" well, that is exactly what it says in both Islam and Christianity as a sin. They specifically advise against fiat! And we have it written on every note in the place and we never notice... wtf? Even if you've never met anyone who goes to Church you'd think someone would notice right?

I think the problem with charging interest is that it's a compounded calculation - it snowballs. The human mind doesn't calculate that. It also doesn't calculate all the possibilities. Then also there's the addictive drug like effect. Hedge fund megastars will always have a lot to say about psychology... and often it's about using artificial means to enforce disipline... something people didn't have much of years ago.

A set fee for a set time seems fairer. Perhaps there should also be a schedule for what happens if you can't pay - what exactly you will and won't lose. Lose your home? Donate a kidney? - if it's written down at the start at least everybody's clear on it.
Are the Islamic banks actually doing this though or are the customers actually ignorant to what they're agreeing to?
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January 23, 2012, 07:32:35 PM
 #19

[quote author=jago25_98 link=topic=58890.msg709096#msg709096

I think the problem with charging interest is that it's a compounded calculation - it snowballs. The human mind doesn't calculate that. It also doesn't calculate all the possibilities. Then also there's the addictive drug like effect. Hedge fund megastars will always have a lot to say about psychology... and often it's about using artificial means to enforce disipline... something people didn't have much of years ago.

A set fee for a set time seems fairer. Perhaps there should also be a schedule for what happens if you can't pay - what exactly you will and won't lose. Lose your home? Donate a kidney? - if it's written down at the start at least everybody's clear on it.
Are the Islamic banks actually doing this though or are the customers actually ignorant to what they're agreeing to?
[/quote]

I think borrowing is almost always a bad idea.

But not because human brains can't handle repeated multiplication by a decimal number.

There isn't any particular reason that money borrowed to pay interest ought be lent interest free itself. If this was prohibited or something all it would mean is that you'd have to go to another lender and pay them interest because it would be a new fresh loan.

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January 23, 2012, 08:47:12 PM
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Its not just loans. Think if your salary was denominated in BTC. You might make $3K the first month and $30K/month.. or $300 a year later. You can see thats just as impossible. As long as btc remains this volatile, it can not be used for things like denominating salaries or non trivial mid or long term loans. And vice versa, as long as bread, oil and salaries are never denominated in BTC, its not going to be stable. Catch 22 which I think btc will never get out of. BUt it doesnt have to, you can denominate loans, salaries and barrels of oil in anything else, and still use BTC to do the transactions.

I have a few suggestions. Maybe it could solve a few of the problems you mentioned. It's not particularly "implementation-accurate" and I most likely have missed a few things, but it's a start. I'm looking for feedback. I think stability is a serious issue that warrants consideration. My proposal could address that.

https://bitcointalk.org/index.php?topic=58102.msg709070#msg709070

http://payb.tc/evo or
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