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Author Topic: Lending Bitcoins without being exposed to BTC-USD rate flucuations  (Read 1164 times)
ripper234
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Ron Gross


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July 25, 2012, 01:25:31 PM
 #1

I have a friend that is interested in investing with some of the lenders listed in this forum, but without being exposed to BTC at all.
He wants the weekly 1%+ interest rates, but isn't currently interested in investing in BTC.

Is a CFD the best option for him to do this? (example)

I suggested that he:
1. Buy some BTC.
2. Short BTC in the same amount via a CFD (I can be the Long partner).
3. Invest BTC in some interest bearing account.

Assuming we both trust each other, this seems optimal.

My email to him:

Quote
So, the suggestion is that:
1. We sign a CFD contract for X BTC
2. You buy X Bitcoins
3. You invest X BTC with whichever "investment house" you want.

Now, Y months have passed, and your BTC have done 1%+ weekly (assuming interest rates haven't changed ... the investment house might change its interest in the future). You should not be effected at all by movements in the BTC-USD rate.

3 examples:

1.
If you buy 1000 BTC at 8 USD, and invest them in a 1% interest per week account, not compounding. Suppose you withdraw your interest every week and sell it.
Then 12 weeks later BTC is worth $12 each.
You withdraw your investment, and get 1000 BTC. You owe me 1000*(1-8/12) = 333 BTC. After paying me, you have 666 BTC = 8,000$, which is exactly what you put in, and you keep all the profits from interest payments. (You can keep these profits as BTC, or sell them, as you wish).

2.
Let's say you buy 1000 BTC at 8 USD, and invest them in the same 1% per week account, this time with compounding interest. You don't withdraw your interest each week.
12 weeks pass, and BTC is now $6.
You withdraw your investment + interest = 1126 BTC.
I pay you 1000*(8/6 -1) = 333 BTC, you now have 1459 BTC.
If you sell it all now, you get $8754. This is a little less than $8000 +12%, because this time you chose to compound your interest payments, and thus were a bit more exposed to the BTC-USD rate.

3.
The same, but this time the investment house defaults on you and vanishes with your money.
In this case, we still need to settle for the CFD. Note that because you are shorting BTC, you can remain owing quite a bit of money in this scenario.
For example, if you invest $10,000, and BTC-USD triples in this time (it's not a far-fetched scenario), and then the investment house defaults, you'll owe me $20,000, on top of losing your own $10,000 investment.

Please do not pm me, use ron@bitcoin.org.il instead
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July 25, 2012, 01:34:02 PM
 #2

I have a friend that is interested in investing with some of the lenders listed in this forum, but without being exposed to BTC at all.
He wants the weekly 1%+ interest rates, but isn't currently interested in investing in BTC.

Is a CFD the best option for him to do this? (example)

I suggested that he:
1. Buy some BTC.
2. Short BTC in the same amount via a CFD (I can be the Long partner).
3. Invest BTC in some interest bearing account.

Assuming we both trust each other, this seems optimal.

My email to him:

Quote
So, the suggestion is that:
1. We sign a CFD contract for X BTC
2. You buy X Bitcoins
3. You invest X BTC with whichever "investment house" you want.

Now, Y months have passed, and your BTC have done 1%+ weekly (assuming interest rates haven't changed ... the investment house might change its interest in the future). You should not be effected at all by movements in the BTC-USD rate.

3 examples:

1.
If you buy 1000 BTC at 8 USD, and invest them in a 1% interest per week account, not compounding. Suppose you withdraw your interest every week and sell it.
Then 12 weeks later BTC is worth $12 each.
You withdraw your investment, and get 1000 BTC. You owe me 1000*(1-8/12) = 333 BTC. After paying me, you have 666 BTC = 8,000$, which is exactly what you put in, and you keep all the profits from interest payments. (You can keep these profits as BTC, or sell them, as you wish).

2.
Let's say you buy 1000 BTC at 8 USD, and invest them in the same 1% per week account, this time with compounding interest. You don't withdraw your interest each week.
12 weeks pass, and BTC is now $6.
You withdraw your investment + interest = 1126 BTC.
I pay you 1000*(8/6 -1) = 333 BTC, you now have 1459 BTC.
If you sell it all now, you get $8754. This is a little less than $8000 +12%, because this time you chose to compound your interest payments, and thus were a bit more exposed to the BTC-USD rate.

3.
The same, but this time the investment house defaults on you and vanishes with your money.
In this case, we still need to settle for the CFD. Note that because you are shorting BTC, you can remain owing quite a bit of money in this scenario.
For example, if you invest $10,000, and BTC-USD triples in this time (it's not a far-fetched scenario), and then the investment house defaults, you'll owe me $20,000, on top of losing your own $10,000 investment.

i would NOT want a "friend" like you to help me with my investing after reading option 3 Cheesy
unclescrooge
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July 25, 2012, 01:45:18 PM
 #3

Interested in his answer Smiley

Meni Rosenfeld
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July 25, 2012, 01:52:37 PM
 #4

Your friend will need to simultaneously buy bitcoins and take a short BTC position of equal size so that the overall exposure to BTC price is 0. There are several ways to physically take the short position, and the facts that you trust each other and that you are looking for a long position help. You can do a CFD as in the linked thread. Or you can do a CFD where the settlement is done by paying traditional currency rather than BTC. Or you can do a loan swap; the friend lends you some amount of USD (which you could use to buy bitcoins to lengthen your position) and you lend the friend some amount of BTC (which could be the same bitcoins that you just bought). And of course the friend could just short on a dedicated margin platform, but since the platform doesn't trust him and needs to profit, this will be more costly.

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ripper234
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Ron Gross


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July 25, 2012, 01:57:52 PM
 #5

Quote
3.
The same, but this time the investment house defaults on you and vanishes with your money.
In this case, we still need to settle for the CFD. Note that because you are shorting BTC, you can remain owing quite a bit of money in this scenario.
For example, if you invest $10,000, and BTC-USD triples in this time (it's not a far-fetched scenario), and then the investment house defaults, you'll owe me $20,000, on top of losing your own $10,000 investment.

i would NOT want a "friend" like you to help me with my investing after reading option 3 Cheesy

That's your choice. Do you think I should insure my friend, for free, for the risk of default by the investment house?

Please do not pm me, use ron@bitcoin.org.il instead
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ripper234
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Ron Gross


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July 25, 2012, 02:02:00 PM
 #6

Your friend will need to simultaneously buy bitcoins and take a short BTC position of equal size so that the overall exposure to BTC price is 0. There are several ways to physically take the short position, and the facts that you trust each other and that you are looking for a long position help. You can do a CFD as in the linked thread. Or you can do a CFD where the settlement is done by paying traditional currency rather than BTC. Or you can do a loan swap; the friend lends you some amount of USD (which you could use to buy bitcoins to lengthen your position) and you lend the friend some amount of BTC (which could be the same bitcoins that you just bought). And of course the friend could just short on a dedicated margin platform, but since the platform doesn't trust him and needs to profit, this will be more costly.

My friends needs to physically buy BTC anyway in order to invest.

So, I figure the easiest/cheapest way to do settlement over CFD is via Bitcoins, so he'll have BTC anyway and settlement via BTC is easier (once you already have BTC).

Please do not pm me, use ron@bitcoin.org.il instead
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Meni Rosenfeld
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July 25, 2012, 02:13:45 PM
 #7

My friends needs to physically buy BTC anyway in order to invest.
Yes, that's what I meant. Buy to have bitcoins, short to neutralize the position.

However, in the loan swap arrangement, the friend won't be the one physically buying coins.

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CoinCidental
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July 25, 2012, 02:42:51 PM
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Quote
3.
The same, but this time the investment house defaults on you and vanishes with your money.
In this case, we still need to settle for the CFD. Note that because you are shorting BTC, you can remain owing quite a bit of money in this scenario.
For example, if you invest $10,000, and BTC-USD triples in this time (it's not a far-fetched scenario), and then the investment house defaults, you'll owe me $20,000, on top of losing your own $10,000 investment.

i would NOT want a "friend" like you to help me with my investing after reading option 3 Cheesy

That's your choice. Do you think I should insure my friend, for free, for the risk of default by the investment house?

you introduce him to the world of  bitcoin
persuade him to invest $10,000 worth
invest it in a risky  BTC  investment scheme
when it defaults he loses $10,000 but stil owes you a debt for $20,000 on top .........

with friends like you ,who needs enemies Cheesy

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July 25, 2012, 02:49:49 PM
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Quote
3.
The same, but this time the investment house defaults on you and vanishes with your money.
In this case, we still need to settle for the CFD. Note that because you are shorting BTC, you can remain owing quite a bit of money in this scenario.
For example, if you invest $10,000, and BTC-USD triples in this time (it's not a far-fetched scenario), and then the investment house defaults, you'll owe me $20,000, on top of losing your own $10,000 investment.

i would NOT want a "friend" like you to help me with my investing after reading option 3 Cheesy

That's your choice. Do you think I should insure my friend, for free, for the risk of default by the investment house?

you introduce him to the world of  bitcoin
persuade him to invest $10,000 worth
invest it in a risky  BTC  investment scheme
when it defaults he loses $10,000 but stil owes you a debt for $20,000 on top .........

with friends like you ,who needs enemies Cheesy
The friend can make his own investment decisions. If he reaps the rewards of a successful investment, why shouldn't he lose on a sour one? And why should ripper234 lose on a bad investment if he gains nothing from a successful one?

Anyway, in practice the amount at stake won't go all the way to $30K. When the BTC prices rises by, say, 50%, the friend will withdraw some of the deposit, and use it to settle part of the CFD, keeping the amount at stake at $10K which he is comfortable risking.

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unclescrooge
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July 25, 2012, 02:52:15 PM
 #10


That's your choice. Do you think I should insure my friend, for free, for the risk of default by the investment house?

+1

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July 25, 2012, 03:28:28 PM
 #11

Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.
ripper234
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Ron Gross


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July 25, 2012, 03:32:42 PM
 #12

Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.

Why the need to introduce another 3rd party into this deal?
What is gained as opposed to what Meni & me proposed?

Please do not pm me, use ron@bitcoin.org.il instead
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July 25, 2012, 03:39:37 PM
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Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.

Why the need to introduce another 3rd party into this deal?
What is gained as opposed to what Meni & me proposed?

The deals that you and Meni propose assume that BTC will go up in price. I doubt that BTC will fall dramatically during the new few months, but if you were to have a short contract, your friend would still be able to pull his initial investment in full, as well as the BTC interest he accrued. If the price goes up, there is less profit for you as you'd be selling the base amount of BTC for less than market value.
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July 25, 2012, 03:59:06 PM
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Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.

Why the need to introduce another 3rd party into this deal?
What is gained as opposed to what Meni & me proposed?

The deals that you and Meni propose assume that BTC will go up in price. I doubt that BTC will fall dramatically during the new few months, but if you were to have a short contract, your friend would still be able to pull his initial investment in full, as well as the BTC interest he accrued. If the price goes up, there is less profit for you as you'd be selling the base amount of BTC for less than market value.
They assume no such thing. If the BTC price goes down ripper234 will have to pay his friend, that's the whole point. All the different ways to handle this are completely equivalent on the price response function, the only thing that changes is the technical details of how it is handled.

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July 25, 2012, 04:22:53 PM
 #15

Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.

Why the need to introduce another 3rd party into this deal?
What is gained as opposed to what Meni & me proposed?

The deals that you and Meni propose assume that BTC will go up in price. I doubt that BTC will fall dramatically during the new few months, but if you were to have a short contract, your friend would still be able to pull his initial investment in full, as well as the BTC interest he accrued. If the price goes up, there is less profit for you as you'd be selling the base amount of BTC for less than market value.
They assume no such thing. If the BTC price goes down ripper234 will have to pay his friend, that's the whole point. All the different ways to handle this are completely equivalent on the price response function, the only thing that changes is the technical details of how it is handled.

Right, but then the money for compensation would come out of ripper234's pocket. Whereas with the future's contract, he'd actually be covered and not have to pay out of pocket. His friend should be safe with all three, I think that ripper also needs to take into account his risk Smiley With some of the mentioned methods ripper does make a profit due to the price increase, where he'd keep a number of coins, but there's the risk of that if the price goes down.
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Ron Gross


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July 25, 2012, 04:31:39 PM
 #16

Instead of shorting the BTC, you would probably be able to create a futures contract with a forum member and have it verified by a third party. Set it for what you got the BTC at, and at the end of investment, the other party buys them from you at the agreed upon price.

Why the need to introduce another 3rd party into this deal?
What is gained as opposed to what Meni & me proposed?

The deals that you and Meni propose assume that BTC will go up in price. I doubt that BTC will fall dramatically during the new few months, but if you were to have a short contract, your friend would still be able to pull his initial investment in full, as well as the BTC interest he accrued. If the price goes up, there is less profit for you as you'd be selling the base amount of BTC for less than market value.
They assume no such thing. If the BTC price goes down ripper234 will have to pay his friend, that's the whole point. All the different ways to handle this are completely equivalent on the price response function, the only thing that changes is the technical details of how it is handled.

Right, but then the money for compensation would come out of ripper234's pocket. Whereas with the future's contract, he'd actually be covered and not have to pay out of pocket. His friend should be safe with all three, I think that ripper also needs to take into account his risk Smiley With some of the mentioned methods ripper does make a profit due to the price increase, where he'd keep a number of coins, but there's the risk of that if the price goes down.

I'm actually interested in increasing my BTC position, so this deal works out for both of us.

Please do not pm me, use ron@bitcoin.org.il instead
Mastercoin Executive Director
Co-founder of the Israeli Bitcoin Association
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