Bitcoin Savings and Trust is probably a Ponzi Scheme: A Petition

[theymos]

This looks exactly like a HYIP to me; I'd be pretty surprised if it turns out to be legitimate. I have purchased some PPT bonds, though. With the extra insurance, the odds of winning seems reasonable.

[Meni Rosenfeld]

This looks exactly like a HYIP to me; I'd be pretty surprised if it turns out to be legitimate. I have purchased some PPT bonds, though. With the extra insurance, the odds of winning seems reasonable.

The insurance is a gimmick. Buying X bonds with 25% insurance at Y BTC each is equivalent to buying 0.75X uninsured bonds at (4Y/3 - 32/75) BTC each. This means that, all else being equal, buying X PPT bonds at more than 1.07 BTC each is dominated by investing 0.75X BTC in pirate at the same MPR.

The bonds in general are good for people who can't invest in Pirate at all, or too little to enjoy the higher interest rates; but assuming everyone is rational, the insurance shuffles some numbers around but it ultimately has no effect on who should buy them and what they gain for it.

Edit: Actually, I've neglected the time value of money in this calculation (which I think is fairly insignificant as far as BTCST investments are concerned). A more accurate decomposition is: Buying X bonds with 25% insurance at Y BTC is equivalent to buying 0.75X uninsured bonds at (4Y/3 - 32/(75(1+r))) BTC each and investing 0.32X/(1+r) BTC in 100% insured bonds with a return of r. If there are no other investment opportunities and money has no time value, r=0 and we go back to the previous case.

[theymos]

The insurance is a gimmick. Buying X bonds with 25% insurance at Y BTC each is equivalent to buying 0.75X uninsured bonds at (4Y/3 - 32/75) BTC each. This means that, all else being equal, buying X PPT bonds at more than 1.07 BTC each is dominated by investing 0.75X BTC in pirate at the same MPR.

The bonds in general are good for people who can't invest in Pirate at all, or too little to enjoy the higher interest rates; but assuming everyone is rational, the insurance shuffles some numbers around but it ultimately has no effect on who should buy them and what they gain for it.

Ah, interesting. I was just intuitively thinking that a lower-risk asset would be more desirable when I want lower risk, despite the lower return.

[Raoul Duke]

The insurance is a gimmick. Buying X bonds with 25% insurance at Y BTC each is equivalent to buying 0.75X uninsured bonds at (4Y/3 - 32/75) BTC each. This means that, all else being equal, buying X PPT bonds at more than 1.07 BTC each is dominated by investing 0.75X BTC in pirate at the same MPR.

The bonds in general are good for people who can't invest in Pirate at all, or too little to enjoy the higher interest rates; but assuming everyone is rational, the insurance shuffles some numbers around but it ultimately has no effect on who should buy them and what they gain for it.

Ah, interesting. I was just intuitively thinking that a lower-risk asset would be more desirable when I want lower risk, despite the lower return.

You just got a free lesson about marketing and why it works

[Meni Rosenfeld]

The insurance is a gimmick. Buying X bonds with 25% insurance at Y BTC each is equivalent to buying 0.75X uninsured bonds at (4Y/3 - 32/75) BTC each. This means that, all else being equal, buying X PPT bonds at more than 1.07 BTC each is dominated by investing 0.75X BTC in pirate at the same MPR.

The bonds in general are good for people who can't invest in Pirate at all, or too little to enjoy the higher interest rates; but assuming everyone is rational, the insurance shuffles some numbers around but it ultimately has no effect on who should buy them and what they gain for it.

Ah, interesting. I was just intuitively thinking that a lower-risk asset would be more desirable when I want lower risk, despite the lower return.

In general, no matter how risky an investment is and how risk-averse the investor, as long as it has positive expectation, it will be attractive if scaled down enough. Insurance can serve a purpose when it is impossible to scale down the investment (and in some other cases), but simple uninsured pass-through bonds can be scaled down.

Details: Utility is generally considered to be fairly accurately modeled as the logarithm of the total net worth. If the initial net worth is T and the gain from an investment per BTC invested is a random variable X, then the expected gain from investing a is

E[log(T+aX) - log(T)] ~ aE[X]/T - a^2 V[X]/(2T^2)

This is maximized when a = E[X]T/(V[X]). The approximation requires that E[X] is relatively small, so may not be applicable precisely to the problem discussed.

[Meni Rosenfeld]

Details: Utility is generally considered to be fairly accurately modeled as the logarithm of the total net worth. If the initial net worth is T and the gain from an investment per BTC invested is a random variable X, then the expected gain from investing a is

E[log(T+aX) - log(T)] ~ aE[X]/T - a^2 V[X]/T^2

This is maximized when a = E[X]T/(2V[X]). The approximation requires that E[X] is relatively small, so may not be applicable precisely to the problem discussed.

Interesting.

Do you have a reference where you pulled this from
and/or where I could read more on this topic ?

http://en.wikipedia.org/wiki/Utility is a good place to start, as is http://en.wikipedia.org/wiki/Decision_theory. The usage of a logarithmic utility function is just common sense (it basically means that a person worth $100K is as excited to gain $1K as a person worth $1M is to gain $10K) and was suggested as early as by Daniel Bernoulli; the formula given is just a straightforward calculation (second-order Taylor expansion of log combined with neglecting of E[X]^2, then optimizing the resulting function) (I reproduced the calculation from memory and I had a small error which I now fixed).

Since the approximation only deals with small deviations anyway, changing the utility function doesn't materially affect it, but it does change the effective value of T, which corresponds to the risk-aversity.

[JoelKatz]

I am not saying it is, I am not saying it isn't. But, why does everyone assume the worst?  So I will lay out a completely plausible case in which someone could pay 1%/day.

Let us assume a Retail Business Model. Well known but I will reduce the mark-up even lower than the typical retail situation.

Business buys widgets for $100 with OPM (other peoples money).

Business sells widgets for $200.

Business makes 100% on the mark-up for a total of $100 profit.

Business pays 1% of the original OPM to the investor.

Business keeps the rest.

Essentially, what you're suggesting is that he may have some source of money that's so lucrative or so enormous that he can afford to give money away. This argument works the same whether it's some absurdly successful retail business or he won the lottery and "it's his money and he needs it now".

1. He may actually be helping to support Bitcoins.

How is he supporting Bitcoins exactly? If you assume that he's not a legitimate investment but a gift (which is what you're suggesting) then he's probably driving legitimate investments out of the market. How does that help?

2. Or since he is really only paying you a small amount of his profits, it doesn't bother him to pay 1%.

In other words, again, it's a gift. That's certainly possible, but as for a reason why -- I've yet to hear one.

[PatrickHarnett]

2. Or since he is really only paying you a small amount of his profits, it doesn't bother him to pay 1%.

In other words, again, it's a gift. That's certainly possible, but as for a reason why -- I've yet to hear one.

Because people operate irrationally.  Perhaps that's why charities survive.

[terrytibbs]

The problem is if you did, you lose.  It is a Game Theory which could be interpreted many ways.  You have 100 pieces of candy. You get them all but there are 9 other people in the room. I would suggest to you that it is to your benefit to share your hoardings. If not, well lets say, you will lose.

Hahahaha! A+, would read again.

[ShadowAlexey]

I just think that to draw some real money you need to have a reasonable percentage. For bitcoin where you can loose half of your investments becouse of a rate drop there is not a big deal to pay 30% a month, just to keep money with you, because who would invest 20k $ if with in a month you can end up with 5? I do think that percentages from 8-30 a month are reasonable, for bitcoins(it all depends on btc\$ rates). Just think about a fact that some people in real life are ok to pay 1% a day for money they take, then why should rates be lover here when you dont give any identity, only your history matters?
The main idea of any ponzi should be easiness of investing...

[miscreanity]

I have access to 1% of the Bitcoin resource pool and can earn a 50% return in the USD resource pool using Bitcoin resources. If I offer part of that 50% return, I can still make a profit while gaining access to 10% of the Bitcoin resource pool. As long as the USD pool is larger than the Bitcoin pool and has room to shrink or shed wealth, it can flow into Bitcoin - even at ridiculously high rates that would be inconceivable if remaining exclusively in the USD pool.

This is parasitic arbitrage at the most fundamental level of financial system foundations, eroding the USD (and other currencies to an extent) while enriching Bitcoin.

Question: assuming an inevitable decline of the USD, and pirate understands this process, why would he kill the golden goose when it still has so much to offer?

[JoelKatz]

Because people operate irrationally.  Perhaps that's why charities survive.

Trust in those who appear to be acting irrationally are the hallmarks of the less-subtle Ponzi schemes. Solid businesses are based on rational actions, not irrational ones. Benevolence is not irrational, but giving money to those who extend trust to people who appear to be acting irrationally and driving out legitimate investment schemes is.

[JoelKatz]

You are essentially asking: Why isn't he greedy enough to keep it all and pay nobody? If he used his own money, that would be plausible. However, it would also be plausible for him to still give back 1% of his profits to help spread the use and interest of BTC.

I don't see that he's spreading the use and interest of BTC. All he's doing is associating Bitcoin with something that appears to be a Ponzi scheme and driving out legitimate investment opportunities.

You seem like the type of person that if they could make all the Bitcoins out there, you would get them and not share anything back.

This is the classic argument in defense of a Ponzi scheme.

The problem is if you did, you lose.  It is a Game Theory which could be interpreted many ways.  You have 100 pieces of candy. You get them all but there are 9 other people in the room. I would suggest to you that it is to your benefit to share your hoardings. If not, well lets say, you will lose.

I have no idea what you're talking about. How do I lose in that scenario?

But as to my post, I am not saying this is what he is doing. Just that there are plausible ways of paying 1% with out it being a ponzi.

Which are? I've yet to hear the example.

Typically startups do this but retroactively with stock options. I wonder what the daily percentage paid on Facebook will be when his IPO sells. Something tells me it might be more than 1% per day.

Sure, but that's because the investors are taking very high risks. Are you suggesting that's what's happening here?

I cannot think of anything else it could possibly be other than a Ponzi scheme, sheer insanity, or something very, very risky for some other reason. That could, of course, mean it's something so strange that I can't think of it. But I know of no other explanation that makes any sense.

[Otoh]

watching...

[JoelKatz]

I gave you an example. Lets put it another way. Lend me $100 dollars to buy and Ipad. I will sell the Ipad for $200. I will give you back $101 dollars and keep $99 dollars. BTW: Anyone in retail will know that 100% Mark-up is low. I did it here for simplicity.

Right, but there I make 1% and the next time, you don't need to borrow any money from me. So this would be a one-time thing that makes a normal profit.

We know Ponzi schemes exist. We know how they work. We know that they do work. Your argument boils down "maybe there's some conceivable way it could be something else, even though I can't quite imagine what it might be". That was the argument made to investors during pretty much ever Ponzi scheme since the first one. Madoff, for example, claimed to have some kind of unusual investment strategy. He claimed no risk. He paid extraordinary interest. If this isn't a Ponzi scheme, it's something else nobody can think of that looks exactly like one.

(By the way, I'm completely open to the possibility that it's something bizarre that I can't imagine. Honestly, from what I've seen, that may actually be more likely than that it's a Ponzi scheme.)

[miscreanity]

I cannot think of anything else it could possibly be other than a Ponzi scheme, sheer insanity, or something very, very risky for some other reason. That could, of course, mean it's something so strange that I can't think of it. But I know of no other explanation that makes any sense.

Is a piece of art selling for USD$119mm indicative of a Ponzi scheme? Why or why not? How is it different or similar to the Bitcoin lending environment?

[JoelKatz]

I cannot think of anything else it could possibly be other than a Ponzi scheme, sheer insanity, or something very, very risky for some other reason. That could, of course, mean it's something so strange that I can't think of it. But I know of no other explanation that makes any sense.

Is a piece of art selling for USD$119mm indicative of a Ponzi scheme? Why or why not? How is it different or similar to the Bitcoin lending environment?

The difference is that nobody is being falsely told that they're investing in something when their money is actually going to pay the cash outs of previous investors. The difference is that real assets are held with a fair market value equal to the total of all amounts invested. While a legitimate investment scheme may look somewhat like a Ponzi scheme from the outside, the insides are totally different.

[PatrickHarnett]

While a legitimate investment scheme may look somewhat like a Ponzi scheme from the outside, the insides are totally different.

Yes, I (and several others) pay 1%+ per week to people.  Some have scarcity, and the return is far above a normal return.  QED I am running a ponzi because it is too good to be true?  No.

If Pirate wasn't at the top of the heap, then someone would throw stones at the next one in line.  Just because people are not smart enough to work it out, it's like the good old days - may as well burn him at the stake for being a witch.

[Matthew N. Wright]

All he's doing is associating Bitcoin with something that appears to be a Ponzi scheme and driving out legitimate investment opportunities.

Now this is just jealousy.  Where is your evidence that he's driving out legitimate investment opportunities?  Because GLBSE, the steaming heap that it is, should be handling even more volume?  Because people should be buying more hot peanuts?

Because more people should be using mybitcoin.com!

You mean this? http://MYBITCOlN.COM

[JoelKatz]

Now this is just jealousy.  Where is your evidence that he's driving out legitimate investment opportunities?  Because GLBSE, the steaming heap that it is, should be handling even more volume?  Because people should be buying more hot peanuts?

I'm not jealous. I have no skin in this game. I'm not associated with any Bitcoin investment of any kind. My total holdings in all things Bitcoin-related are worth under $50.