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Author Topic: The Lending Bubble  (Read 4619 times)
nrd525
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March 26, 2012, 11:09:20 PM
 #21

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.
Borrowers aren't smarter than other investors.  In fact I'd argue they are less smart.  Any investor with a medium level of long term success would have cheaper sources of financing from their regular assets or lines of credit. They are equally likely to lose money as make it.  The market is roughly zero sum.

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.

Good points.

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.

If the volatility can affect both borrower and lender why would it increase interest rates? 

If the volatility increases the interest rate, then can we hypothesize that this might indicate a general bull market mood?  For instance, this would match up with the bitcoinica indicator where there is greater demand for going long than short.

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

If lenders aren't making big bucks (eg. if we have lots of competition on the side of lenders which is possible - especially as the market matures), then there is a transfer of money from people who are paying high interest rates to those who are defaulting on loans -- which is also not ideal.

My general concern remains that high risk loaning increases the amount of speculation in the economy without increasing its more useful services/products base.  My optimistic view is that the lender market could mature through use of an online anonymous trust system (or other means of securing loans), competition, shared information, and reduced rates.
 

Don't day trade.
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PatrickHarnett
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March 27, 2012, 12:23:56 AM
 #22

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My general concern remains that high risk loaning increases the amount of speculation in the economy without increasing its more useful services/products base.  My optimistic view is that the lender market could mature through use of an online anonymous trust system (or other means of securing loans), competition, shared information, and reduced rates.

And this nicely encapsulates the current global financial markets.

Also note, that when the banks stopped lending (due to risks, GFC and other reasons), many economies around the world screeched to a halt.  Having a banking system here is therefore important to the bitcoin economy.

Also, and while this is a specific rather than general example, if you're a 15 year old wanting $500 for a speedy GPU to mine some coins, you're not going to get bank financing.  But with a few-month payback, the rates we're lending at makes sense.
nrd525
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March 27, 2012, 03:25:30 AM
 #23

Another problem is lender reserves.  Banks have reserves and often a minimum level is set by a central bank.  But BTC lenders can pick how much reserve they want to have. 

If you have an increase in defaults, then lenders will need to increase their reserves and this can trigger a small crisis.  This could be triggered by a BTC economic crisis or a non-BTC one (eg. like the 2008-2009 recession).

Inflation or Deflation could also cause problems.

Don't day trade.
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March 27, 2012, 03:31:02 AM
 #24

Sure it's a bubble.

Loan(big) , wash(GPUMAX), escape.


PatrickHarnett
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March 27, 2012, 03:32:12 AM
 #25

Another problem is lender reserves.  Banks have reserves and often a minimum level is set by a central bank.  But BTC lenders can pick how much reserve they want to have. 

If you have an increase in defaults, then lenders will need to increase their reserves and this can trigger a small crisis.  This could be triggered by a BTC economic crisis or a non-BTC one (eg. like the 2008-2009 recession).

Inflation or Deflation could also cause problems.

But those reserves are set at stupidly low levels (below 5%).  The use of liquid funds definition becomes relevant, and any spare liquid funds are normally not held by the bank, but provided to a central bank to minimise actual cash held.  Ages ago I worked at a bricks and mortar bank - total cash held was around $200k at the branch, yet some accounts were many millions.

Most of my funds are liquid (held or on call) greater than 50%.  If I had all my depositors withdraw and all my term loans default I'd be mad as hell, but can cover every coin.
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March 27, 2012, 01:44:04 PM
 #26

 
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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.

I think this is a gross overstatement. MPOE holds > 3k bitcoins in bonds this month, for instance. Unless the pirate holds > 50k or something the market will not be "destroyed", just some lenders will have learned the diversification lesson the hard way.

The price of the BTC didn't swing wildly with the linode hacks, so unless the pirate holds significantly over 50k it won't touch the price. Not to mention options dampen swings to begin with.

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March 27, 2012, 01:48:03 PM
 #27

Where wasn't he talking of the price of BTC? In the place where he says "price of BTC"?

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March 27, 2012, 01:51:49 PM
 #28

Unless the pirate holds > 50k or something
Wink

Don't mix your coins someone said isn't legal
imsaguy
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March 27, 2012, 02:03:28 PM
 #29

Has anyone seen my pwny?

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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
MPOE-PR
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March 27, 2012, 02:07:27 PM
 #30

 
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some lenders will have learned the diversification lesson the hard way

Wink

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teflone
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You're fat, because you dont have any pics on FB


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March 27, 2012, 06:22:44 PM
 #31

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn

For Canadians by Canadians: Canada's Bitcoin Community - https://www.coinforum.ca/
imsaguy
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March 27, 2012, 06:24:42 PM
 #32

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn

GPG keeps about 80% of would-be scammers out.  Generally, scammers are lazy.

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
teflone
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March 27, 2012, 06:31:13 PM
 #33

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn

GPG keeps about 80% of would-be scammers out.  Generally, scammers are lazy.

Newsflash..  Most of us are...

Now get to work, there is 46 dollars on it...

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BTC_Bear
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March 28, 2012, 05:16:12 AM
 #34

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn


Thunderbird with Enigmail.



Corporations have been enthroned, An era of corruption in high places will follow and the money power will endeavor to prolong its reign by working on the prejudices of the people until wealth is aggregated in a few hands and the Republic is destroyed. ~Abe Lincoln 1ApJdWUdSWYw8n8HEATYhHXA9EYoRTy7c4
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March 28, 2012, 05:26:50 AM
 #35

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn


Thunderbird with Enigmail.



You are missing just a few steps... like the whole OTC part...

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March 28, 2012, 05:42:17 AM
 #36

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn


Thunderbird with Enigmail.



You are missing just a few steps... like the whole OTC part...


Didn't think I did. OTC - Over the Counter, Mailing List (you know like the one everyone has on a regular basis)

Make Offer -> Click Reply All -> Accept Offer -> Click Reply All : Send P2P for details -> Complete Trade : Click Send All -> Confirm Deal : Wait for next Offer.

Plus with the caveat of it all being encrypted.

Corporations have been enthroned, An era of corruption in high places will follow and the money power will endeavor to prolong its reign by working on the prejudices of the people until wealth is aggregated in a few hands and the Republic is destroyed. ~Abe Lincoln 1ApJdWUdSWYw8n8HEATYhHXA9EYoRTy7c4
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March 28, 2012, 07:46:15 AM
 #37

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn


Thunderbird with Enigmail.


You mean using an actual mail client like in the 90's ?
How quaint and charming Smiley




Lol, Yes as opposed to IRC from the 80's.

He did ask for Easy.

Corporations have been enthroned, An era of corruption in high places will follow and the money power will endeavor to prolong its reign by working on the prejudices of the people until wealth is aggregated in a few hands and the Republic is destroyed. ~Abe Lincoln 1ApJdWUdSWYw8n8HEATYhHXA9EYoRTy7c4
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April 19, 2012, 09:18:08 AM
 #38

btc loans help the btc economy

They do, but in an unexpected way:

The largest obstacle to a vivid economy is deflation and hoarding. Why would you spend a BTC now when you expect it to be worth more tomorrow? Why not spend USDs instead when you expect USDs to be worth less tomorrow? A commodity that is too dear to spend is useless as a currency.

The majority of the BTCs are concentrated in the few hands of the BTC rich. If their loans would work out they would control even more BTCs over time (due to high compound interest rates). That would suck the BTCs out of circulation like a black hole sucking in all the available matter.

Luckily the solution is simple: the black hole explodes spilling the collected BTCs all over the place. Loans go bad and BTCs spread out: from the hoarding few to the careless many. The law of entropy applies and the money remains in circulation. Everybody wins: except the few BTC rich who keep the economy alive by loosing their money on bad loans. But even they win: loosing half of your BTCs on bad loans but keeping the economy alive is still better then having 2x as many BTCs that became worthless because the underlying economy has stopped.

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JohnBigheart
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April 19, 2012, 02:13:36 PM
 #39


Case in point: a currency that can be divided down to
8 decimal places has never existed before. All physical
currencies (USD, Gold, etc ...) get to a point where they
become unusable if deflation persists (you can't pay with
a millionth of a gram of gold).


This - of course - is not true with fiat currencies like the dollar.

You can bring 500, 1.000, 10.000 or 1.000.000 USD banknotes in circulation to keep up with inflation.
See http://en.wikipedia.org/wiki/Hyperinflation for numerous examples in recent history.

Similarly US dollars can be subdivided by the federal bank to infinity.
Nothing prevents the FED from printing 1 cent, 1 mCent, or 1 uCent banknotes if deflation requires their daily use.

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April 19, 2012, 06:40:04 PM
 #40

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.

I hate it, I dont have the time, I read the the directions..  And im no slouch with computers..

Its a PITA, and my time is valuable.  in other words...  Fuck that noise..


BOUNTY!

10 bitcoins to a OTC type system for bitcoin lending and trades that is easier than microwave popcorn


Thunderbird with Enigmail.


You mean using an actual mail client like in the 90's ?
How quaint and charming Smiley




Lol, Yes as opposed to IRC from the 80's.

He did ask for Easy.

Most things that are worth doing are not easy. OTC registration is one of them. Its just like many aspects of the business world - if you want to taken seriously, you have to jump through a few hoops first.
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