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.
It's possible that the risk may be
outside of the Bitcoin environment. Assuming small operations doesn't give enough perspective because small fry generally have an eye on growth, not preservation.
Since Pirate's business is geographically dependent, I'll outline one
possible perspective. When looking to preserve wealth, there are a few options that high net worth entities have always been able to rely upon:
- Precious Metals (esp. Gold & Silver)
- Land & Real Estate
- Fine/Rare Artwork
- Gemstones
Not every HNW entity is at the high end of the spectrum, so ownership of any of the above might not be held in ideal locations, or liquidation may not be easy. Asset seizure or account freezing can be far more devastating to HNW entities than it might be for middle and lower class individuals. Risk of confiscation is a 100% loss consideration; without much to confiscate, the financial loss isn't as great. If there happens to be another form of wealth preservation that's even more difficult to attack than the above list, you can be certain that it will garner attention. Even a handful of Euro or USD millionaires could easily take a sizable stake without breaking a sweat, yet still look at their purchase as insurance.
Example:
Assume my net worth is USD$10,000,000 and I want to protect as much as I can. Keep in mind that
nothing is truly free. With the absolute worst-case scenario of 100% loss due to some form of loss, theft, or destruction, I elect to protect 25% in total, so $2,500,000 is reserved.
All of the above are physical items that could be somehow taken. Astute HNW individuals often keep their eyes open for investments or ways of protecting their assets. Let's say I've been hearing about this 'Bitcoin' thing from another HNW associate. I observe for a while and learn what I can about the system. At the same time, I'm well aware of increasing threats from government that may seriously jeopardize the safety of my accumulated wealth. Not only would my savings be at risk, but also my livelihood. It would be folly to think that HNW persons are incapable of sensing when sentiment toward their social class is negative.
My decisions on wealth preservation lead me to conclude that equities are too risky given recent events, and the banking system is too dangerous for wealth storage. Not counting fees, I decide to allocate my security assets as so:
$1,000,000 is put into gold.
$500,000 is put into property.
$400,000 is put into art.
$400,000 is put into gemstones.
$200,000 is put into Bitcoin.
In the event that Bitcoin fails, I'm only out 2% of my net worth and less than 10% of my preservation fund. If it takes off, I could easily become a Bitcoin Billionaire. If it remains about where it is, no harm has been done and my wealth has been preserved.
How much would I be willing to pay for that protection? There are many who spend a good percentage of their net worth on security. I certainly don't want to cause any serious disturbances for whatever I'm putting my wealth into unless there's an impending threat and time is of the essence. If I have to pay 50-100% on top of the going rate to acquire an asset without drawing attention to myself, so be it. It's often a small price to pay for peace of mind.
Other cases can be made from a low net worth individual or business perspective, but they mostly fall under the trade-off in
perceived risk between classes, not so much speculation or growth within a single asset class.
A Pecuniary Pirate's Path to Profit: use the little straw to sip from a big jug.
It boils down to finding a niche, and in retrospect people say: "Why didn't
I think of that?"
Are you sure the exchanges reflect Bitcoin's real value? Do you have access to dark pools? Are there other assets
less desirable or risky than Bitcoin... ?
The way Pirate has things structured, a sudden failure is much less likely than a gradual evaporation. Unless, as he said, the price appreciates sharply.
What will happen with all these loan portfolios if (when actually) BTC exchange rate jumps 40-50% in one month?
There may be defaults in extreme cases. Pirate may have to either keep a large reserve of BTC, halt/reduce interest payments, or acquire quietly by using USD from the other side of his business so as not to further displace price. That isn't to say 40-50% change is even enough to cause such stresses; the number may be 400-500% or more.
This is basically what we're seeing in traditional financial markets, only in the opposite direction. In the case of lenders, halting interest payments is a very powerful tool that actually indicates positive
growth, whereas in traditionally mature markets it's indicative of negative potential.
Of course, the ride will end sometime; the interest rates will decline and competition will increase. However, until the 21mm unit asymptote is approached, there's still room for expansion.
