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Author Topic: The Lending Bubble  (Read 4616 times)
nrd525
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March 26, 2012, 03:42:41 AM
 #1

I'm guessing there is a lending bubble.

I'm skeptical about how people can afford to pay 2-5% percent weekly interest (a 180% annual to 1160% annual rate).  You cannot produce more than a 10-15% annual return without taking risks.  And to get anywhere near 50% you need to take major risks.  With Bitcoin, good miners can maybe make a 50% annual return (though that assumes the hardware doesn't go bad).  So people are not using this money for productive investments. They are using it because they are addicted to spending more than they earn (or are undergoing a short-term hardship).

The only reason I could see people borrowing money is if they are very short-term loans for purchasing drugs on Silk Road, or avoiding some kind of large fee (like a bank overdraft fee).  For the long run, I think a drug-buyer would realize that they can get more drugs for the same amount of money if they don't borrow.

You can get credit cards with interest rates of 20% in the United States and many other countries (average APR as of Feb 2010 is 14.7% -- http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Interest-rates-APRs-credit).

According to Consumers Union (http://www.consumersunion.org/finance/paydayfact.htm) payday loans have rates of up to 17.5% for a loan that ranges from one week (a 911% annual interest rate) to 4 weeks (212% annual rate).  I guess the lenders are competing with that market in terms of interest rates, but in this case you don't have any collateral other than a weak internet reputation system.  If you are lending to the least trustworthy clients, you really want collateral.

I'm guessing that, like the US credit bubble, the Bitcoin lending bubble will burst as borrowers default and the loan shark lenders will lose money.  Unlike the US bubble, nobody involved in Bitcoin will get bailed out.

I'm wondering if this will have a negative impact on the value of Bitcoin.



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March 26, 2012, 03:51:58 AM
 #2

There are non-interest fees.

For example I closed a deal on some GPU but I didn't have the coinz.
Seller said he would take Paypal but I had to pay the fees.

Instead I asked for a 2 week loan @ 3% interest and used my hashing power.  Now as an interest rate I consider 3% for 2 weeks (216% APR) to be high but I would have paid the same for using Paypal.  If I had enough coins I never would have taken the loan.

The other options was to put a deposit down and wait for Dwolla to clear.  Due to limited rep at the time they wouldn't ship until funds cleared.  Now Dwolla had negligible cost but it would have taken a week.  At the time the cards were earning about 3% of their value (net) per week.  So waiting would still have cost me 3%

Paypal - give 3% to banksters
Dwolla - lose 3% revenue waiting a week
BTC loan - give 3% interest to lender, keep entire transaction BTC only, and help improve BTC economy.



I agree the high interest rates in generally do indicate some bad due diligence.  It can't all be for productive purposes and that means either the lender or the borrower is making a bad decision.

When loans burst I don't think it will have any effect on Bitcoin.
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March 26, 2012, 03:56:47 AM
 #3

So one possible reason to use this service is because it is hard to get regular money into Bitcoins. Probably a lot of people don't have balances at an exchange, and getting money to an exchange (and setting up an account) takes time.

That said, if you aren't mining, you'll need to pay back the loan in BTC and setup an exchange account to do that.

Don't day trade.
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March 26, 2012, 04:07:09 AM
 #4

There is way more to it than that.

One of my local buyers of coins paid roughly $1/coin over the exchange rate to get coins this year (about $1000 worth).
I must also be one of those brainless (I am a Starfish after all) lenders losing lots of money on lending (think I'm up to 300 coins in bad loans so far).

However, I pay interest on deposits around 6.5%/month and spent some time explaining this to someone why this was my next cheapest source of funding despite having cash sitting in an account earning 5%/year.  I also have done some (limited) borrowing and have an 8% 500 BTC loan with someone.

But, on the other side of the lending bubble, yes, there are good rates to lend at, and some might be going into god-knows-what.  Other people need bridging finance as funds clear, and getting a good deal on a GPU in BTC might mean the difference between saving $100 and missing out.

Also, I expect the rates to come down significantly as the volatility in cross rates falls, and some of the other sources of funds squeeze down the payment levels.  Until then, and I'm planning on it happening, I'll make a few coins.

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March 26, 2012, 11:01:42 AM
 #5

Lol. You cannot even break even without taking risks considering fiat's value almost always declines with time. There will always be risks, but high risks do not always equate to a bubble. Ideally, lenders should be diversified enough to be able to suffer a default by Pirate. I am wholly convinced he is the reason we demand high rates and pay out high rates. Were Pirate to default in current conditions, the lending market would be destroyed (consumer loans have a high rate of default and usually relatively poor returns), and the price of BTC may swing wildly. He has in excess of 40kBTC borrowed ATM, and I suspect his total BTC assets would shock many. The idea that he's not earning more than he's borrowing, at this point, is pretty ludicrous (I do believe the vast majority of lendees are making significantly more than they pay, as most money goes toward business ideas, not individuals [afaik]). I don't think anyone's put in a solid effort calculating how much Pirate's paid out in interest, but I'd be very surprised if it wasn't at least 2x the amount he currently is borrowing.

Pirate effectively (factoring in compound interest) pays out well over 30% MPR. Since his investment requirement for full rate demands at least 2,000BTC, the risk/opportunity is largely confined to lenders. There's a very large barrier to entry, both in lending (due what I believe is poor quality in consumer loans) and "pirating" (due to extremely high capital requirements). There are almost no lenders who are not lending to Pirate, either directly or indirectly. More than anything else, I believe that is the "bubble." Depending on what Pirate may be doing, he may no longer bother taking loans in the future - or maybe he will, but the total amount he wants to borrow may make up a much smaller portion of all lenders' assets. Either way, I think that "artificial" inflation of interest rates on BTC loans will eventually decrease.

Aside from Pirate & the lack of government interference (which works both in and out of BTC lenders' favor), BTC & USD lending also differ in that BTC makes up only a fraction of most lenders' assets, I imagine largely because of the extreme currency volatility (I don't want to keep all my assets in something which swings 5-20% per week). The Bitcoin market cap is pretty darn tiny compared to any major currency's. If lenders suddenly lost all their Bitcoin assets, I don't think anyone would have a problem paying off their deposits just by converting fiat to BTC. It kind of takes away from the idea that Bitcoin is a serious currency rather than a play-thing, though.


tl;dr - definitely in an interest rate bubble. Rates will eventually lower, but probably not for consumer loans. Instead, more businesses will likely be able to get the funding they desire. I don't see any "destruction" (creative or otherwise) occurring due to it, however. At worst, a few lenders might quit playing if Pirate defaults. In the extremely unlikely event of a lender defaulting (outside of the cause being that person dying without a will for his coins), I would think the rest of us would consider paying off his depositors just to ensure it remains thought of as a fairly safe investment. After that, some type of FDIC-like insurance agency for depositors might pop up. I'm rambling o/t again, though.


ETA: I always feel like a dick bringing up the possibility of Pirate defaulting, as if there's reason to suspect him of doing so. I only intended to point out the possibility, not trying to say it's likely. As I implied, I don't think Pirate's any type of ponzi merely because he's consistently paid, and likely paid multiple times the total amount currently lent to him. Can't really assess risk when he's so opaque, and that's not meant to suggest anything negative. Pirate is a Bitcoin-weighty fellow who's very involved with the lending market -- having a discussion on a possible Bitcoin lending bubble without Pirate is pointless.

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March 26, 2012, 11:34:34 AM
 #6

The BTC-DIC or better yet the BDIC = Bitcoin Deposit Insurance Corporation.  I like it.  But what a PITA to set up and run.  Bank audits and bank auditors, setting premiums with no real default rate information, monitoring claims of participation by banks, making sure that only banks that participate can advertise participation, what could we do to banks that claim they participate in the program but do not - or to banks that participate but do not pay their premiums, handling that first default (large or small) - my head spins.

BTW even with only two default on my books (asshats: gurg2.o and doubleicaras) and charging what you are calling too high an interest rate I am just barely profitable in my consumer loans and not making anthing more than "hobby" money.  If anything, the rates on consumer loans are generally too low to be sustainable - until we create a better consumer credit reporting system.

Our family was terrorized by Homeland Security.  Read all about it here:  http://www.jmwagner.com/ and http://www.burtw.com/  Any donations to help us recover from the $300,000 in legal fees and forced donations to the Federal Asset Forfeiture slush fund are greatly appreciated!
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March 26, 2012, 12:18:04 PM
 #7

watching.
Glad to have you on board since you are the second leading cause of the "lending bubble" Wink

Thanks for the 0.5% relief by the way!

Our family was terrorized by Homeland Security.  Read all about it here:  http://www.jmwagner.com/ and http://www.burtw.com/  Any donations to help us recover from the $300,000 in legal fees and forced donations to the Federal Asset Forfeiture slush fund are greatly appreciated!
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March 26, 2012, 12:29:14 PM
 #8

The BTC-DIC or better yet the BDIC = Bitcoin Deposit Insurance Corporation.  I like it.  But what a PITA to set up and run.  Bank audits and bank auditors, setting premiums with no real default rate information, monitoring claims of participation by banks, making sure that only banks that participate can advertise participation, what could we do to banks that claim they participate in the program but do not - or to banks that participate but do not pay their premiums, handling that first default (large or small) - my head spins.

BTW even with only two default on my books (asshats: gurg2.o and doubleicaras) and charging what you are calling too high an interest rate I am just barely profitable in my consumer loans and not making anthing more than "hobby" money.  If anything, the rates on consumer loans are generally too low to be sustainable - until we create a better consumer credit reporting system.
Matt says someone from the Downtown Athletic Club of Orlando is working on a revolutionary new credit system which'll be advertised with the first issue of Bitcoin Magazine..... soon.

We're talking about BDIC in Skype. Premiums paid by member banks + banks can then advertise how safe they are+ public BDIC address for public to verify + multi-sig for multiple voting Board members who are able to disburse funds to depositors in failed banks... ....... Be-dick? maybe we should take the "DIC" out of it somehow? NCUA... National Credit Union Association (isn't that synonymous with National Credit Association Association?).... International Bitcoin Lenders' Association? IBLA? Lenders Organization Accruing.... Not-distrust. .... Simply "Lenders' Union"?

There is a competent web designer or two in the Lenders' group.... Maybe it's time we start to really organize as a collective. Maybe it's time to issue fiat notes to people. We could call them BitCons... You can deposit them at any bank of your choosing for additional fiat BitCons and a sub-market could develop using this meaningless accounting system. ... .... o.O ......... Wait....

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March 26, 2012, 03:29:14 PM
 #9

Majority of the loaning i do is "i have 4.xncjakbfBTC" That would beeee.... (fake) $49.99, Great, Now i cant take out $60 at my banks ATM at 2 in the morning... Unless i get More coins...
I could wait untill morning and have (fake) $55.55 but thats still not enough, I'd have to wait a second day.. DAWN OF THE SECOND DAY, I have 6.cndsncBTC that gets meee (fake)$59.99 FUUUUUUUUUU, I should've gotten a loan two days ago!.

Seems very trivial and minor, And it is. But i cannot see a negative impact for the bitcoin community other than the massive "eveyone is underselling thier coins" , But really, Were going to do that anyways, I think it's the perfect balance between a "Do it and Pay for it" service to have intrest, And the intrest Comes from coiners, And goes to coiners, But the Fiat, Goes to merchants, Allowing people to more frequently use coins as a realistic method of purchase.

Work doesnt pay you Daily, And if they did, You'd be pretty tempted to spend money considering that it's just landing in your hand at the end of each long hard day.
People go on spending sprees when they get---- Im rambling...

TL;DR=btc loans help the btc and Real economy, I dont see where the harm is coming from.

http://bitcoin-otc.com/viewratingdetail.php?nick=DingoRabiit&sign=ANY&type=RECV <-My Ratings
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March 26, 2012, 04:09:52 PM
 #10

I'm guessing there is a lending bubble.

I'm skeptical about how people can afford to pay 2-5% percent weekly interest (a 180% annual to 1160% annual rate).  You cannot produce more than a 10-15% annual return without taking risks.  And to get anywhere near 50% you need to take major risks.  With Bitcoin, good miners can maybe make a 50% annual return (though that assumes the hardware doesn't go bad).  So people are not using this money for productive investments. They are using it because they are addicted to spending more than they earn (or are undergoing a short-term hardship).

The only reason I could see people borrowing money is if they are very short-term loans for purchasing drugs on Silk Road, or avoiding some kind of large fee (like a bank overdraft fee).  For the long run, I think a drug-buyer would realize that they can get more drugs for the same amount of money if they don't borrow.

You can get credit cards with interest rates of 20% in the United States and many other countries (average APR as of Feb 2010 is 14.7% -- http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Interest-rates-APRs-credit).

According to Consumers Union (http://www.consumersunion.org/finance/paydayfact.htm) payday loans have rates of up to 17.5% for a loan that ranges from one week (a 911% annual interest rate) to 4 weeks (212% annual rate).  I guess the lenders are competing with that market in terms of interest rates, but in this case you don't have any collateral other than a weak internet reputation system.  If you are lending to the least trustworthy clients, you really want collateral.

I'm guessing that, like the US credit bubble, the Bitcoin lending bubble will burst as borrowers default and the loan shark lenders will lose money.  Unlike the US bubble, nobody involved in Bitcoin will get bailed out.

I'm wondering if this will have a negative impact on the value of Bitcoin.

I think this analysis is somewhat simplistic, and ignores many of the aspects that make bitcoin lending unique. First of all, in a hugely volatile market like this, short selling is common, as are arbitrage and similar deals. Borrowing to make more money from deals like this is an obvious thing to do, and if they work out, they can easily make more money than the interest rate.

Second, low interest rates in "the real world" are supported by what I've previously called (https://bitcointalk.org/index.php?topic=73599.msg816149#msg816149) an economy of scale on collections infrastructure, which none of the lenders here has anything close to. Furthermore, getting low-rate loans from a bank (or even a credit card) is contingent on many things that do not apply here. We (often) don't ask for proof of identity here, or collateral, and have very little legal proof against you if you do choose to default. This significantly lowers the barrier to entry for people seeking loans (even for nefarious purposes that wouldn't stand at all in mainstream finance), but the lowered barrier to entry also carries a higher counterparty risk with it for the lender, which needs to lead to a higher return for the incentives to work out.

Finally, possibly even larger than counterparty risk is simply exchange rate risk. Most of us need USD (or local fiat) a lot more than we need bitcoins, so their exchange rate with mainstream currencies is a crucial aspect of the value of a loan. Sure, we could lend out 100 coins now and give you almost $500 worth of coins, but if you pay us back 600 coins in 6 months and the value has dropped to $0.10, we've just lost a lot of money. The opportunity cost of me lending you 100 coins for 6 months back in June 2011 is pretty huge. We went from over $30/coin to around $2 in that period. I'm not saying that we could have predicted that $30 was the peak and sold there, but it's a major factor in risk calculations, and thus contributes significantly to interest rates.


In short, if you want to set up the whole collections and legal infrastructure that underpins "real-world" loans, giving us full legal recourse and access to cheap legal advice for pursuing defaulted loans, then interest rates can drop. If you can stabilize the bitcoin exchange rates, the interest rates will drop even more significantly. But I don't consider the current situation to be anything remotely resembling a bubble. It certainly isn't ideal that the cost of credit is so high, but it's a necessary feature of this young market. I do acknowledge that IBB gives out loans for free, but they tend to be small, and senbonzakura has higher trust standards than other lenders, thus limiting overall access to loans.

Don't assume that we're idly sitting around becoming fat cats here. Lenders make a lot of money on successful loans, but that's amortized across defaulted loans, so to apply the word "shark" to us is insulting. A few of us are working on improving the credit situation to give lenders a better picture of credit history and creditworthiness, and overall to streamline the whole bitcoin credit business. These changes don't happen overnight, though Smiley
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March 26, 2012, 04:20:50 PM
 #11

Coming Soon!

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EIEIO:
https://bitcointalk.org/index.php?topic=60117.0

Shades Minoco Collection Thread: https://bitcointalk.org/index.php?topic=65989
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March 26, 2012, 04:22:48 PM
 #12

Right now I'm willing to accept the "high" interest rates in the BTC lending industry as it is very hard to verify legitimate lendees versus scammers. With time I'm confident a system will form either through word of mouth or a unified reputation tracking system(like heatware, ebay feedback, etc).

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March 26, 2012, 05:14:38 PM
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unified reputation tracking system(like heatware, ebay feedback, etc).

You mean like Bitcoin-OTC?

(BFL)^2 < 0
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March 26, 2012, 05:26:24 PM
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Would prefer something that combined tracking for users outside of the limited bitcoin economy. There are individuals, like myself, who have reputations built up over years within over communities that don't help due to not being something used within the bitcoin economy. I suppose what I'm looking for is a universally agreed upon reputation system not unlike eBay's feedback ratings. Not everyone wants to sit in an IRC channel trading BTC to build reputation.

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March 26, 2012, 05:32:00 PM
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Would prefer something that combined tracking for users outside of the limited bitcoin economy. There are individuals, like myself, who have reputations built up over years within over communities that don't help due to not being something used within the bitcoin economy. I suppose what I'm looking for is a universally agreed upon reputation system not unlike eBay's feedback ratings. Not everyone wants to sit in an IRC channel trading BTC to build reputation.

Not everyone does sit in an irc channel trading BTC to build reputation.  While the url is bitcoin-otc, the ratings aren't strictly BTC based.  In addition, ratings aren't based on trades, but on trust.  You might not have ever traded with someone but still trust them with your kid's life. You'd rate them accordingly.

Coming Soon!™ © imsaguy 2011-2013, All rights reserved.

EIEIO:
https://bitcointalk.org/index.php?topic=60117.0

Shades Minoco Collection Thread: https://bitcointalk.org/index.php?topic=65989
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March 26, 2012, 05:35:22 PM
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Now someone is pointing out the bubble. there is still time before it burst. You still have time to run.

16SvwJtQET7mkHZFFbJpgPaDA1Pxtmbm5P
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March 26, 2012, 05:37:12 PM
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unified reputation tracking system(like heatware, ebay feedback, etc).

You mean like Bitcoin-OTC?

Bitcoin-OTC, sorry to say, is a giant PITA for the average user,
most of whom wouldn't know a shell if it bit them in the ass,
much less how to use gpg.

Plus, using Bitcoin-OTC, can you tell me how much debt - say -
ineededausername currently has outstanding in aggregate ?  Grin



Do ebay feedback ratings tell you how much debt someone has?  How about heatware? Exactly.

Coming Soon!™ © imsaguy 2011-2013, All rights reserved.

EIEIO:
https://bitcointalk.org/index.php?topic=60117.0

Shades Minoco Collection Thread: https://bitcointalk.org/index.php?topic=65989
Payment Address: http://btc.to/5r6
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March 26, 2012, 06:15:43 PM
 #18

Now someone is pointing out the bubble. there is still time before it burst. You still have time to run.

Did you just ignore everything everyone said to refute the bubble claim?
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March 26, 2012, 06:44:31 PM
 #19

Now someone is pointing out the bubble. there is still time before it burst. You still have time to run.

Did you just ignore everything everyone said to refute the bubble claim?
Now now, obviously it must be a bubble because people in here are so deluded that they deny it! Wink

It’s not a bubble because of

1) Currency Risk

2) Counterparty Risk

3) Not efficient market yet

4) Affected number of people and volume, even with pirateat40, is insignificant in Bitcoin world.

Interest rate is likely to decrease over the long term as these factors change, but it will not "burst" and create havoc.

Any questions?

"Bitcoin had been transformed from an anarachistic challenge to the financial status quo, to the crypto spawn of Satan, fuelled by cut-throat greed and delusions of avarice." - MatTheCat
"these people don't seem to want to stop till Bitcoin is completely destroyed and left like an old cum rag in the corner of the room." - ShroomsKit
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March 26, 2012, 07:32:54 PM
 #20

I'm impressed.  This thread looks like 90%+ of the lending business (lenders) contributing to the OP misnomer.  I can think of a couple that haven't written something, or who don't need to.

btw - I agree with znort - having been talked through GPG signing by INAU in slightly under two hours and going on IRC, I haven't been back since.  It was a giant PITA.
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