A day in the life of a pirate.

[pirateat40]

I'm not paying interesting interest (see I'm just tired) in fiat, it's in Bitcoins.  My lenders do whatever they want with the profits I pay out.

Oh there are doubts what you are paying interest in. Or more accurately that you prefer to have 2-3 orders of magnitude higher cost of capital when denominated in BTC as compared to cost of capital denominated in USD. This much is clear and really indisputable.

My statement is still not refuted:

there are only two possibilities:

1. The issuer is acting irrationally.
2. The issuer is offloading to "investors" some enormous risks. As such these are not really "investors", but simply gamblers. And they should be really not so much concerned about return on capital as about return of capital.

Is there a third possibility? If yes what it is? If not, is it 1 or 2?

I'm not asking you to understand what I do or why I do it.  I explained my reasoning, which is more than I'd normally speak about publicly and the endless questions followed.

And with that, I'll be headin' aft t' me ship, good night.

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[notme]

I'm not paying interesting interest (see I'm just tired) in fiat, it's in Bitcoins.  My lenders do whatever they want with the profits I pay out.

Oh there are doubts what you are paying interest in. Or more accurately that you prefer to have 2-3 orders of magnitude higher cost of capital when denominated in BTC as compared to cost of capital denominated in USD. This much is clear and really indisputable.

My statement is still not refuted:

there are only two possibilities:

1. The issuer is acting irrationally.
2. The issuer is offloading to "investors" some enormous risks. As such these are not really "investors", but simply gamblers. And they should be really not so much concerned about return on capital as about return of capital.

Is there a third possibility? If yes what it is? If not, is it 1 or 2?

3. The issuer does not want to risk having to default on a USD loan, and makes the assumption bitcoin can drop to 0.01.  If he borrows $10k and buys 2000BTC@$5.  A week later BTCs drop to 0.01, his 2200 BTC (1 week @ 10%) can now be sold for $22, and he has a deficit of $9978, assuming no interest on the USD loan.  Now, there are a lot of people who are already taking the risk that bitcoin will not fall, and he gives them a chance to put their money to work.  He pays slightly better than the going rate of lending and can still turn a profit.  The above average rate is justified by his admittance of exposure to a large, quick upmove.  If you want to break pirate, spend enough USD to make us all rich .  Until then, quit with the FUD.

[Vladimir]

gigavps, hmm, interesting, thanks.

However, I might be especially slow today, but again why would anyone in his right mind borrow at 1.5% a day? Except to invest into some ponzi scheme or just because of being completely irrational?

So I am happy to admit that there is

3. The issuer acts as a proxy and simply a conduit of some set of other irrational actors passing some huge risks to investors/gamblers. This is pretty close to 2. just one more proxy on top of it.

Any risks of Bitcoin going to 0 tomorrow do not really justify 1.5% a day or 10% a week interest rates. The only justification of that would be huge risk of default. Of course those could be diversified over a large number of borrowers and as such mitigated to some degree.

So pirate, are you paying 10% weekly dividend to lend it out? This would make sense potentially. However, doing it without disclosing the risks to investors is not nice, IMO.

[jamesg]

gigavps, hmm, interesting, thanks.

You are quite welcome. These facts are well known to bitcoin lenders. I will even save you the scolding for banishing yourself from the bitcointalk forums. 

Lending bitcoins is quite a profitable business. There are a number of big lenders who have distinguished themselves and are doing quite well.

[cunicula]

This is what I think:

Step 1) Borrow Massive Bitcoin by offering way above market interest rate.
Step 2) If no major downturn in market, borrow more bitcoin a la Ponzi if possible.
     Step 2a) If borrowing is no longer possible, then go bust. Assume new identity, go to step 1.
Step 3) If major downturn in market, sell off massive bitcoin in attempt to set off panic. Pocket massive dollars.
Step 4) If panic ensues, purchase nearly free bitcoin to pay back investors.
Step 5) If no panic ensues, then go to step 2.

[jamesg]

blah blah blah blah

Good thing most of the forum has you on ignore.

[Vladimir]

OK, cool, here is new version of how one can invest into a ponzi scheme on GLBSE:

consider the following hypothetical GLBSE listed company.

Someone places BMMM IPO on GLBSE. The company does not disclose what they do, however they pay rather good dividends. Everyone is happy (for now).

What they do is the following, BMMM loans BTC to a number of effectively anonymous identities on the internet, these anonymous borrowers convert BTC's into USD's and "invest" it into a ponzi scheme http://en.wikipedia.org/wiki/MMM-2011 run by http://en.wikipedia.org/wiki/Sergei_Mavrodi that reportedly currently pays up to 50% per month of "dividends". BMMM pockets 30%, pays out 20% to their "investors". They also hope that with such "profitability" they will be able to accumulate enough money to buy out the shares once the "master ponzi" breaks down.

see also (google translate if needed) https://bitcointalk.org/index.php?topic=77316.0
and read up on to http://en.wikipedia.org/wiki/Stockholm_syndrome it might get applicable.

The above is a ponzi scheme by proxy which BTW is pretty close to what all the investment banks out there are doing with the central banks and ultimately the fed being the "master ponzi".

Note that I have added to previously posted scheme only what is highlighted above in bold. If so this is still a ponzi scheme by proxy or two. Kind of p2p version of ponzi scheming where some can claim that they have no effective knowledge of any wrongdoing and therefore avoid any liability.

If this is true, the end result is the same. Just wait until MMM collapses and see how all the bitcoin lenders go under overnight.

[PatrickHarnett]

I do a little lending, and selling.  Most of the last six months I have been making 10% to 15% per month.  My borrowers have been willing counter-parties and buyers similarly willing to pay (sometimes) $1/BTC above market rates.  Why, because there are other fees/costs that make this affordable.

I must be doing something right because demand has remained strong and my rate of defaults is quite low.  I even provide an on-call deposit service, much smaller than Pirate, and paying much lower rates, and you could say my guarantee to repay is worthless too if you wanted.

If you think the interest rates are wrong, I expect you have never lived in a high inflation or volatile economy, and are just very limited in life experience.  I still remember the days (in an OECD country) offering 22% deposit rates.

[Vladimir]

I still remember the days (in an OECD country) offering 22% deposit rates.

Per week per month or per year? Do you remember the days (in an OECD country) offering 6000% annual deposit rates?

BTW I am not saying that lenders or you specifically are doing something badly wrong. I am saying that it is very possible that a significant part of borrowed money ultimately ends up in a ponzi scheme and once that implodes you will face defaults.

  Most of the last six months I have been making 10% to 15% per month.

Most of last six month MMM "investors" have been making a killing too.

[JusticeForYou]

Maybe it's Alaskan King Crabs instead of MMM. http://en.wikipedia.org/wiki/Alaskan_king_crab_fishing

Is it a Derby or Quota? maybe both or neither.

[Vladimir]

ohh sure it could be whatever, there are loads of various hypes, or let's say a portfolio of HYPE's. Invariably the point still stands, our hypotetical GLBSE investors of BMMM invest by proxy into unknown risks that are 2-3 orders of magnitude higher than investing into some kind of MBS (morgage backed securities).

[coblee]

I'm not paying interesting interest (see I'm just tired) in fiat, it's in Bitcoins.  My lenders do whatever they want with the profits I pay out.

Oh there are doubts what you are paying interest in. Or more accurately that you prefer to have 2-3 orders of magnitude higher cost of capital when denominated in BTC as compared to cost of capital denominated in USD. This much is clear and really indisputable.

My statement is still not refuted:

there are only two possibilities:

1. The issuer is acting irrationally.
2. The issuer is offloading to "investors" some enormous risks. As such these are not really "investors", but simply gamblers. And they should be really not so much concerned about return on capital as about return of capital.

Is there a third possibility? If yes what it is? If not, is it 1 or 2?

P.S. I am aware of only one biz model where 10% per month cost of capital would make sense. It is a ponzi scheme.

I'm really not sure what's so hard to understand. His business requires holding on to a ton of bitcoins. It's more bitcoins then he's comfortable risking in his own portfolio. So he would want to offload that risk to people and share the profits with them. So it's a win-win situation.

So why does he prefer to borrow btc at such a high rate versus borrowing usd at a lower rate? notme answered it pretty well. Borrowing btc means he returns btc and borrowing usd means he returns usd. So there's no currency risk involved in holding the capital. (They is still currency risk involved if bitcoin price shoots up when he's trying to exchange usd back to bitcoins.)

Now think of it in reverse. If you had amazing business idea that can for sure make 10% a week on an almost unlimited amount of usd capital, would you want a usd loan that costs 5% a week? Or would you want a btc loan that costs 5% a month. Sure you would make a lot more with the btc loan. But what happens when btc prices shoots up to $30? You're left holding usd that you need to convert back to btc to return to your lenders. You would have to have increased your capital 6x in order to return that loan. Now that's a risky loan for the lenders!

So the smart thing for pirate to do is to take however many bitcoins he feels comfortable owning and put that into his business. As his business demands more bitcoins than he has, he should borrow the rest. It's true that he won't make as much from the bitcoins he borrows, but then he has no risk on them either.

I used to question why pirate would need to borrow so many bitcoins and not use his own. But now that I understand why, I believe that pirate's lending is legit and not a ponzi scheme. Well the only other thing is I think he may be paying too much (7% a week) to his lenders when most other people are only paying half as much. He could probably reduce it to 5% a week and still be able to get as many lenders as he needs. But maybe he is not greedy and want to share the wealth.

[PatrickHarnett]

I still remember the days (in an OECD country) offering 22% deposit rates.

Per week per month or per year? Do you remember the days (in an OECD country) offering 6000% annual deposit rates?

BTW I am not saying that lenders or you specifically are doing something badly wrong. I am saying that it is very possible that a significant part of borrowed money ultimately ends up in a ponzi scheme and once that implodes you will face defaults.

I could go and find other examples - I picked on one I was familiar with.

Perhaps in another time, we would all have been complaining about the "gods", or that it was witchcraft.  The cry of the moment is that IT MUST BE A PONZI because people can't work out what's going on.  I find that tiresome, repetitive and rather unintelligent.

I'll go back to my nice stable financing business (where I'm charging 280% per year and have good customers and low default risk).

[Vladimir]

I'll go back to my nice stable financing business (where I'm charging 280% per year and have good customers and low default risk).

OK you have convinced me. Will launch FF+tor and set's up a proper anonymous identity (or use a previously prepared one), will borrow at 280% per year (or more) and will invest into MMM at 50%-60% per month. Looking forward to paying up interest up until the death of MMM, let us all pray it will last a few more years. But biz model is very sound. Once MMM fails will set up a new identity or ten and invest into MMM III. Rinse and repeat.

Disclaimer: no I am not going to do that, just kidding. But others will, I bet.

[drakahn]

... the same thing, but with bitcoins?

[payb.tc]

If I don’t pay back btc loans what happens?

teflone will visit your house.

[ineededausername]

If I don’t pay back btc loans what happens?

teflone will visit your house.

Or Uncle Vinny *shudder*

[JusticeForYou]

I'm not paying interesting interest (see I'm just tired) in fiat, it's in Bitcoins.  My lenders do whatever they want with the profits I pay out.

Oh there are doubts what you are paying interest in. Or more accurately that you prefer to have 2-3 orders of magnitude higher cost of capital when denominated in BTC as compared to cost of capital denominated in USD. This much is clear and really indisputable.

My statement is still not refuted:

there are only two possibilities:

1. The issuer is acting irrationally.
2. The issuer is offloading to "investors" some enormous risks. As such these are not really "investors", but simply gamblers. And they should be really not so much concerned about return on capital as about return of capital.

Is there a third possibility? If yes what it is? If not, is it 1 or 2?

P.S. I am aware of only one biz model where 10% per month cost of capital would make sense. It is a ponzi scheme.

I'm really not sure what's so hard to understand. His business requires holding on to a ton of bitcoins. It's more bitcoins then he's comfortable risking in his own portfolio. So he would want to offload that risk to people and share the profits with them. So it's a win-win situation.

So why does he prefer to borrow btc at such a high rate versus borrowing usd at a lower rate? notme answered it pretty well. Borrowing btc means he returns btc and borrowing usd means he returns usd. So there's no currency risk involved in holding the capital. (They is still currency risk involved if bitcoin price shoots up when he's trying to exchange usd back to bitcoins.)

Now think of it in reverse. If you had amazing business idea that can for sure make 10% a week on an almost unlimited amount of usd capital, would you want a usd loan that costs 5% a week? Or would you want a btc loan that costs 5% a month. Sure you would make a lot more with the btc loan. But what happens when btc prices shoots up to $30? You're left holding usd that you need to convert back to btc to return to your lenders. You would have to have increased your capital 6x in order to return that loan. Now that's a risky loan for the lenders!

So the smart thing for pirate to do is to take however many bitcoins he feels comfortable owning and put that into his business. As his business demands more bitcoins than he has, he should borrow the rest. It's true that he won't make as much from the bitcoins he borrows, but then he has no risk on them either.

I used to question why pirate would need to borrow so many bitcoins and not use his own. But now that I understand why, I believe that pirate's lending is legit and not a ponzi scheme. Well the only other thing is I think he may be paying too much (7% a week) to his lenders when most other people are only paying half as much. He could probably reduce it to 5% a week and still be able to get as many lenders as he needs. But maybe he is not greedy and want to share the wealth.

What collateral is used to secure these loans? When I get a signature loan at a bank the collateral is my Equifax score. If I don’t pay it back I will never buy anything on credit again (oversimplified). If I don’t pay back btc loans what happens?

Well when I have done loans on the forum. The only 'collateral' I used was 'Trust' specifically using the WoT. I offered a rate on the forum far below what others charge. 1-3%/mo.  

If you don't pay back the loan, nothing happens to you from my stand point. But this is what happens because you didn't, you will have trouble getting other loans and other people borrowing rates will increase to counteract your bad debt.

So when people get mad at lenders like Patrick and others, they are misplacing their anger. It should be directed at the people that didn't payback their loans.

I don't bemoan others rates, especially for short term loans. Would I like to see rates come down? Sure. Will they? That depends on whether people payback the loans.

Coincidently, you can give Fiat(USD) loans with BTC as collateral if you wish. You could have a completely parallel market with BTC as an underlying security and no one would even have to know.

It is a truly unique concept that hasn't been around for a long time.

[Vladimir]

Another question. Does anyone know now many BTC denominated loans that were made slightly more than one year ago below 1$ have not been defaulted on (or restructured to be USD denominated)? Care to guess? 100%?  50%? 10% maybe.

What will happen with all these loan portfolios if (when actually) BTC exchange rate jumps 40-50% in one month?

[brendio]

Could you clarify please. What would be an example of an operation where having USD liabilites as opposed BTC liabilities is by 2-3 orders of magnitude more risky?

Why those risks could not be hedged or otherwise mitigated cost efficiently?

If you were running pirate's business, where would you go to mitigate exchange rate risk cost effectively?

As far as I know, they would all involve counterparty risk. How would pirate be feeling right now if he had used solely Bitcoinica to hedge? Pirate has absolutely no counterparty risk. Investors need to trust him. He doesn't need to trust anyone else to make good on an option contract.

Now, I'm not saying whether the avoidance of this counterparty risk is worth the amount pirate is paying. In fact, I have said before he could easily lower his rates and still get a good deal of funds.