Why I used to trust Patrick Harnett

[N12]

Okay, it seems you are not sarcastic.

But, being credit worthy it makes no sense for me to borrow BTC if I am long BTC at any interest rate above what I can get on the open fiat market.

I feel that's where the reasoning is wrong because BTC loans may be quicker/easier to attain and you may explicitely need Bitcoins, not fiat. Converting fiat to Bitcoin is another risk/hurdle/time consumer in the chain. Basically, 1000 Bitcoins right now can be much more valuable to me than 11000 USD in a couple days at best. There are some opportunities that are profitable enough to warrant the need, and they don't have to be shorting. For instance, there was a nice profit to be had if you bought GIGAMINING for 1 BTC per.

As for what you can do with coins apart from lending them out or investing in some "shares" or "bonds" to generate a BTC profit, you can always speculate on the exchange rate, simply selling and buying or leveraging/hedging your long position via shorts/leverage or options.

[Fjordbit]

Convincing a traditional bank to fund your bitcoin business really isn't going to happen, not necessarily because its a bad business idea, but because bitcoin is an unexplored minefield and no bank wants to be the guy out there exploring it first.

It's pretty easy to get unsecured credit for a bitcoin business. The APR is in the 20s, but it beats the average bitcoin loan which is in the 200-400% APR range. As far as I can tell, these microloans are for people who want to buy something right now and thus don't want to wait for their money to clear through dwolla/gox or are short a little on a purchase and can mine the difference in a week or so. There doesn't seem to be an appetite for large loans both on the borrowing side because the APRs are too high and on the lending side because the risk of default is too high.

[imsaguy]

It's pretty easy to get unsecured credit for a bitcoin business.

What US bank is going to give you a $50k unsecured loan for a business plan that's based in bitcoin?  I'll be there in a jiffy.

[bitlover]

Look guys, there does indeed a place where loans with huge interest rates like the ones being discussed in this thread happens all the time: The loansharks business.

Now, the interest rates for you get from those upstanding individuals are all over the place. In some super-desperate situations it can even be a daily 10% but, in general, it is usually nowhere near that high. 10% Monthly (A bit above 2% weekly, which puts it very close to the BTC rates) is quite usual in some low-risk markets. That is, there is some collateral, and the shark is not lending to a (known) crack addict.

The thing about loanshark loans is that they're a very personal, almost intimate sort of loan. The loanshark knows you personally, knows where you or your grandpa live. On the other hand you know that, in the case that you cannot pay back, then you -or maybe sweet old grandpa- is going to get a visit by some dudes with lousy manners and baseball bats. Even knowing all this, people who desperately want to pay still default, because that's just how the world works. So faces are rearranged and bones get broken.

If the defaults happen when there is such a clear incentive for the borrower to avoid them at all costs, then how is it possible that the BTC borrowers can pay similar rates with such certainty as to be able to properly fund a company giving 1.5% return weekly? I mean, on one side we have an almost-anonymous, zero-collateral, electronic, distant transaction with some technical-minded guy in the internet and on the other we have a personal, with-collateral, in-real-life one with some huge dude with plenty of bats in a shady part of town. And while sharkloans have plenty of losses somehow BTC loaners are secure enough to ask for investors to come and join the good life?

Now, I am not saying that it is impossible for that to happen. I bet lots of people do pay their loans properly. But having enough people taking big enough loans, for long enough to fund a good-sized operation and having all of them properly pay back their loans? while still possible it's *extremely* unlikely. The winning the lottery 3 times in a row kind of unlikely, the one that smells fishy. Sorry dudes, but I really don't think you're better than loansharks at getting your loans paid back, yet you keep increasing your operations and asking for more capital.

[SaltySpitoon]

I don't get how Patrick is being called into question, and Joel, your argument all seems to be centered around the fact that Pirate defaulted. Here is how Patrick is different. He's not running some unknown scheme, hes taking money from people, and using his good reputation as a major loan operator on the BTC forums, then using his own name to distribute that $, getting a good interest loan from people that are trustworthy by his standards, which are much better than most, as he knows what to look for in a person looking for a loan. If he is giving out loans at 10%, and then he pays his investors 8% and keeps 2% for himself, how is that not a sustainable business practice? Hes just paying out a little less than what he is getting in interest from other loans that he gives.

People are investing in the service of having their $ invested for them. People give their $, Patrick looks for people to loan to, he gets paid back the $ + Interest, pays his interest owed to his investors with interest he gets back from the loan, and takes a bit for himself. Provided the fact that Patrick has a great reputation, and is the standard in BTC loans, I would say more than likely, his business wont collapse, and you wont be defaulted on. Its a pretty solid business model.

That being said, I've never obtained a loan, nor given $ to Patrick, so I would consider myself to be unbiassed on this matter. I think people are just going a little bit Pirate crazy lately.

Now please, instead of calling Patrick a scammer, why not calmly ask him about his business' feasibility, how he plans to stay in business, real applicable questions?

[JoelKatz]

I don't get how Patrick is being called into question,

You might try reading what I'm writing then.

and Joel, your argument all seems to be centered around the fact that Pirate defaulted.

No, not at all.  Pirate's default was absolutely inevitable. Reasonable people gained no new information from Pirate's default.

Here is how Patrick is different. He's not running some unknown scheme, hes taking money from people, and using his good reputation as a major loan operator on the BTC forums, then using his own name to distribute that $, getting a good interest loan from people that are trustworthy by his standards, which are much better than most, as he knows what to look for in a person looking for a loan. If he is giving out loans at 10%, and then he pays his investors 8% and keeps 2% for himself, how is that not a sustainable business practice? Hes just paying out a little less than what he is getting in interest from other loans that he gives.

It's not sustainable because he is taking all the risk, doing all the work, and keeping a tiny sliver of the profits.

People are investing in the service of having their $ invested for them. People give their $, Patrick looks for people to loan to, he gets paid back the $ + Interest, pays his interest owed to his investors with interest he gets back from the loan, and takes a bit for himself. Provided the fact that Patrick has a great reputation, and is the standard in BTC loans, I would say more than likely, his business wont collapse, and you wont be defaulted on. Its a pretty solid business model.

If that's what he was doing, his number one priority would be to reduce the amount he is borrowing to zero. No rational businessman would be making any kind of decent profit and yet continue to borrow at comically high interest rates. It makes no sense. If you think that model is great, think about how great it is when you're not paying absurd amounts of interest.

That being said, I've never obtained a loan, nor given $ to Patrick, so I would consider myself to be unbiassed on this matter. I think people are just going a little bit Pirate crazy lately.

Now please, instead of calling Patrick a scammer, why not calmly ask him about his business' feasibility, how he plans to stay in business, real applicable questions?

You don't have to ask the guy who claims he can make money by turning invisible to explain the details about how he turns invisible, how he makes money by becoming invisible, and so on. If Patrick expects people to trust them with their money, *he* has to make the case that this trust is justified. This isn't some minor deficiency or a case where there's some specific detail I'm asking for that other people might not particularly care about. This is the big pictures that's clearly broken. For example, if Patrick defaults, how will investors know that this is due to a legitimate investment loss and not due to Patrick deciding not to pay people? And on what basis can the risk of default be assessed? These are the most basic questions. It's not like there's some ultra-specific detail I want that Patrick could give me if I just asked for it clearly enough.

[SaltySpitoon]

I don't get how Patrick is being called into question,

You might try reading what I'm writing then.

and Joel, your argument all seems to be centered around the fact that Pirate defaulted.

No, not at all.  Pirate's default was absolutely inevitable. Reasonable people gained no new information from Pirate's default.

Here is how Patrick is different. He's not running some unknown scheme, hes taking money from people, and using his good reputation as a major loan operator on the BTC forums, then using his own name to distribute that $, getting a good interest loan from people that are trustworthy by his standards, which are much better than most, as he knows what to look for in a person looking for a loan. If he is giving out loans at 10%, and then he pays his investors 8% and keeps 2% for himself, how is that not a sustainable business practice? Hes just paying out a little less than what he is getting in interest from other loans that he gives.

It's not sustainable because he is taking all the risk, doing all the work, and keeping a tiny sliver of the profits.

People are investing in the service of having their $ invested for them. People give their $, Patrick looks for people to loan to, he gets paid back the $ + Interest, pays his interest owed to his investors with interest he gets back from the loan, and takes a bit for himself. Provided the fact that Patrick has a great reputation, and is the standard in BTC loans, I would say more than likely, his business wont collapse, and you wont be defaulted on. Its a pretty solid business model.

If that's what he was doing, his number one priority would be to reduce the amount he is borrowing to zero. No rational businessman would be making any kind of decent profit and yet continue to borrow at comically high interest rates. It makes no sense. If you think that model is great, think about how great it is when you're not paying absurd amounts of interest.

That being said, I've never obtained a loan, nor given $ to Patrick, so I would consider myself to be unbiassed on this matter. I think people are just going a little bit Pirate crazy lately.

Now please, instead of calling Patrick a scammer, why not calmly ask him about his business' feasibility, how he plans to stay in business, real applicable questions?

You don't have to ask the guy who claims he can make money by turning invisible to explain the details about how he turns invisible, how he makes money by becoming invisible, and so on. If Patrick expects people to trust them with their money, *he* has to make the case that this trust is justified. This isn't some minor deficiency or a case where there's some specific detail I'm asking for that other people might not particularly care about. This is the big pictures that's clearly broken. For example, if Patrick defaults, how will investors know that this is due to a legitimate investment loss and not due to Patrick deciding not to pay people? And on what basis can the risk of default be assessed? These are the most basic questions. It's not like there's some ultra-specific detail I want that Patrick could give me if I just asked for it clearly enough.

All you have been saying is that his business is not sustainable, your reasoning is pretty flawed. We are not sure what kind of "sliver" of a profit Patrick is getting, for all we know, he could be getting those 20-30% loans, and then paying back a fraction of that to his investors. Why would he want to reduce the amount of other people's BTC he is holding to zero? if he holds 500 BTC of other peoples, and 500 of his, he can lend out 1000 BTC total, and pay interest on 500 of those BTC. If he has 500 of his own BTC, and 1000 of other peoples BTC, he can lend out 1500 BTC, get more interest generated, have to pay back 2x as much interest to his investors, but he is still making 2x more in commissions, as well as he is still getting the full amount on his personal 500 BTC. The more he has, the more he can lend out, the more he can lend out, the more total $ he makes. And your point about how Patrick expects people to trust him with their money? They already do. You are the first person who I've ever seen call Patrick out, I'm quite sure all of his investors as well as many potential investors feel quite secure investing in Patrick.

[P4man]

They already do. You are the first person who I've ever seen call Patrick out, I'm quite sure all of his investors as well as many potential investors feel quite secure investing in Patrick.

You base your trust on the person, Joel (and I and many others) base our distrust on the business model. I dont know Patrick, but that doesnt matter, since I might not even be able to spot a ponzi scam artist if he lived under my own roof. OTOH,  its fairly easy to spot a businessmodel that has all the trademarks of a ponzi. IOW, leave your trust or distrust of Patrick out of it, if anything, Pirate should have taught you that lesson. Instead focus on what is known and unknown about the business.

[Scott J]

The only anti-Patrick argument that hasn't been fully retorted is why doesn't he borrow fiat at a cheaper rate and convert it to bitcoin?

My uninformed guesses:

Ease - no value is quicker and easier to move about than a bitcoin.
Risk - by keeping all business in BTC there is no exchange rate risk.
Ideals - helping the Bitcoin community. This also has value in itself.

[JoelKatz]

The only anti-Patrick argument that hasn't been fully retorted is why doesn't he borrow fiat at a cheaper rate and convert it to bitcoin?

Why borrow at all? If he's making a narrow profit margin, why does he bother taking all the risk? If he's making a decent profit, why not use that profit to pay down debt?

Risk - by keeping all business in BTC there is no exchange rate risk.

Only an idiot would pay 100% APR to short with zero leverage.

Ideals - helping the Bitcoin community. This also has value in itself.

People convincing others to invest in something that looks exactly like a scam does not help the Bitcoin community one bit. The community was worse, more acerbic and heavily divided, before Pirate defaulted than after.

[Bitcoin Oz]

The only anti-Patrick argument that hasn't been fully retorted is why doesn't he borrow fiat at a cheaper rate and convert it to bitcoin?

Why borrow at all? If he's making a narrow profit margin, why does he bother taking all the risk? If he's making a decent profit, why not use that profit to pay down debt?

You could ask why bitcoin mining exists at all because it is essentially marginally profitable and by your logic bitcoin itself doesnt make any economic sense!

[JoelKatz]

You could ask why bitcoin mining exists at all because it is essentially marginally profitable and by your logic bitcoin itself doesnt make any economic sense!

Bitcoin mining != Bitcoin itself

Although I do agree that most Bitcoin mining is a bad investment and people largely do it as a hobby or for fun. Those people who do it as a business generally do take a large risk and don't make a very large profit. Compared to buying Bitcoins and holding them, mining isn't usually a good deal. The biggest problem is technology raising the difficulty before you can pay off your hardware expenses.

[P4man]

You could ask why bitcoin mining exists at all because it is essentially marginally profitable and by your logic bitcoin itself doesnt make any economic sense!

Because you can sell the risk to suckers in the form of fixed MH mining bonds.

[Bitcoin Oz]

You could ask why bitcoin mining exists at all because it is essentially marginally profitable and by your logic bitcoin itself doesnt make any economic sense!

Because you can sell the risk to suckers in the form of fixed MH mining bonds.

I agree with this. It also means you get to pay off your mining gear with other peoples money.

[Micon]

You missed my point.  I simply said (per Joel) that it is more profitable for me to use my own money than to borrow money in order to lend it out.  The lending side works just fine - we have that figured out and do not need help from a noob in that regard.  People are willing to pay what they are willing to pay.  I am willing to risk what I am willing to risk.  Free market.  I am no longer willing to be on the paying side of the interest equation.  This is a personal decision.  Patrick and others will do what they will do.

you are a complete and utter scumbag.

Remember when you put "Pirate is not a Ponzi" in your signature to make newish users think the Pirate scam was a legitimate investment so you could perpetuate it a bit longer?  

do you feel bad about doing that?



edit: see BurtW still rubbing salt in the wounds of his Pirate victims to this day:  https://bitcointalk.org/index.php?topic=97094.msg1178786#msg1178786

[jbreher]

Why borrow at all? If he's making a narrow profit margin, why does he bother taking all the risk? If he's making a decent profit, why not use that profit to pay down debt?

Puzzle out why a bank might pay you interest on the money you deposit on account with them. Now reflect that answer back to the pre-FDIC days. Is your answer still valid? If so, I'm guessing you have your answer as to why Patrick would pay interest to his depositors. (hint: it optimizes his personal TVM)

I remain keenly interested in your reply to BurtW's question explicitly addressed to you. Is there any single economic activity you would deem rational for someone who is long bitcoin?

[JoelKatz]

I remain keenly interested in your reply to BurtW's question explicitly addressed to you.

Sorry, which question was that?

Is there any single economic activity you would deem rational for someone who is long bitcoin?

Probably just about anything that doesn't promise impossible returns. Holding bitcoins can certainly be rational. Investing in mining can certainly be rational.

[greyhawk]

Investing in mining can certainly be rational.
[/quote


Unless the owner has such bad business sense he destroys any and all value the 'company' may ever had in one fell swoop. Like what's happening to a certain devilish little mining company right now.

[JoelKatz]

Investing in mining can certainly be rational.

Unless the owner has such bad business sense he destroys any and all value the 'company' may ever had in one fell swoop. Like what's happening to a certain devilish little mining company right now.

I probably should have bolded the "can". Obviously, you have to make a careful evaluation of whether the person trusted with your money deserves that trust. And mining will always be risky. Generally speaking, IMO, buying bitcoins and holding them is usually better than buying mining gear and mining with it.

[jbreher]

I remain keenly interested in your reply to BurtW's question explicitly addressed to you.

Sorry, which question was that?

Is there any single economic activity you would deem rational for someone who is long bitcoin?

Probably just about anything that doesn't promise impossible returns. Holding bitcoins can certainly be rational. Investing in mining can certainly be rational.

Holding, it may be argued, is not an economic activity, as it does not result in trade involving bitcoins. While it stretches the point, the same could be said of mining.

Perhaps you missed the post, or the points therein, in his post: https://bitcointalk.org/index.php?topic=92279.msg1170475#msg1170475

But more to the point, the returns PatrickHarnett is making are clearly not impossible. The Lending forum is replete with records of such returns. You could argue that you don't think such a biz could scale, and you could argue that in your opinion, it does not make sense to expand such a biz using others' capital. But that would be projecting your internal bias upon others' reality.