So, assume I already have Bitcoins on Coinbase and have a verified account to sell them easily. Theoretically, my plan for free money would look like this:
- Say I have 11 BTC on Coinbase.
Wire $10k to OKPAY ($25 bank fee, 0% OKPAY commission)
Send OKPAY money to BTC-E, $200 fee (2%).
- Now I have $9,775 on BTC-E.
Within ~1 second of each other, I enter a market order to buy 10.754 BTC on BTC-e for $9,775, and sell 10.754 BTC on Coinbase for $10,488.21 (after their 1% fee).
These are the real market rates at the time of this post (accounting for book depth). I make $488 with no risk other than holding the Bitcoin for awhile, which anyone holding Bitcoin does anyway.
Before I attempt to do this and find out the hard way why it ends up costing me money in the process, could someone please kindly point out the flaw in my plan?
Correct, expect arbitrage is risky in illiquid markets. Here your BTC will take a while to get into your wallet after buying them on Coinbase or BTC-e (about 10 days on Coinbase). Your wire transfers will also take a few days to clear. During these wait periods the prices of BTC will be subject to wide swings.
And at last, your arbitrage profit will get severely eaten by the fees of the banks and BTC exchange platforms.
It's never easy to make a profit in an arbitrage scheme (unless you have a crushing competitive advantage such as transaction speed): if it were easy, enough people would use the scheme, bringing the price differences back to a range were turning a profit would be difficult again... so if there are significant price differences between exchanges, it's a signal of arbitrage difficulty.
I already have the Bitcoin in Coinbase though, I don't have to wait for anything. It's true that the wire transfer will take time, but the value of the dollar isn't going to change much in that time. If my only risk is the Bitcoin fluctuating in that time, it seems like free money for anyone who is already holding Bitcoin and would already be subject to that risk.
Check withdraw limits. You might have $10k+ on an account like BTC-e and have to withdraw it over several days. If you keep arbitraging you will have more and more money in an exchange that is risky (BTC-e isn't trusted because it is written by one dude Bulgaria or something like that and the owner could just close up shop at anytime and you're fucked).
Also while all your transfers are clearing bitcoin could swing one way or the other totally screwing things up (coinbase takes several days to clear bitcoin buys (not sure about sells))
BTC-e is based in an unknown city in Bulgaria and the operators are unknown. Keep that in mind when trading there. This is probably the most important factor for the prices there being so low, they could basically just take your money and run without you having any chance of getting hold of the operators.
I suspect the visualized data will be much more interesting, since different local economies behave differently. For example, when BTC was "crashing" yesterday to $850 USD, Chinese trades were still holding well about $1000 USD. Eventually the arbitrage opportunity becomes too big and the gap is closed. Watching this is fascinating.
Now that I have a huge stash of bit coins I was thinking of making a service/startup where you could lend out your bit coins to people who would agree to pay you back a slightly higher number of coins in the future. Kind of like a bank but not corrupt and full of banksters like the federal reserve and JP Morgan. Once I have traction I can IPO but instead of sell my shares for cash I would sell them in bit coins.
You want to borrow bit coins so that you can improve your business and then pay back the coins with increased profits due to the improvements. Isn't that obvious? I'm not interested in dollars because I don't think they are particularly useful. I convert all my dollars to bit coins whenever I can. Look at the price of bit coin in dollar terms and you'll see everyone else is doing the same thing.
Do you think the API for borrowing a deflationary currency should have a different API than an inflationary one?
Your conversion makes sense (USD -> BTC) so long as both mantain the
current trend (BTC increasing in value wrt USD). Why? It's like
investing in a stock or commodity that's increasing. I invested extra
cash in a few stocks, including TSLA, while it was on the rise. This
gave me a better ROI than holding USD or investing it in a CD or other
low interest rate account.
But as a borrower, deflation blows. If I borrow 100 BTC and the terms
of the loan are that I have to pay back 100 BTC + 10 BTC as interest,
but the value of BTC has increased by another 10% I'm really paying
21% interest on the loan.
But as a borrower, inflation rocks. If I borrow 100 USD and the terms
of the loan are that I have to pay back 100 USD + 10 USD as interest,
but the value of USD has decreased by 10% I'm really paying 0%
interest on the loan (actually, I might be able to beat inflation and
come out ahead).
This goes back to what I mentioned in another thread [1] about buying
and selling in either type of currency.
Let me hand wave some things, we'll assume that the real value of an
item or ROI is static, and only the nominal value is changing with
inflation or deflation.
Inflation: I borrow money to buy an item. I pay interest on the loan,
and gain the benefit of having the item today rather than a year later
when I would have saved up the cash. Over that year I pay off the
loan, but with inflation I may get a discount of sorts on the item. If
inflation is 10%, the nominal value is 10% higher the next year. If
the interest payment is less than 10% I've saved money. If it's more
than 10%, hopefully there was a profit in having the item now rather
than later or I lost money.
Deflation: I borrow money to buy an item. I pay interest on the loan,
and gain the benefit of having the item today rather than a year later
when I would have saved up the cash. Over that year I pay off the
loan, but with deflation I have an added cost. If deflation is 10%,
the nominal value is 10% lower the next year. If the interest payment
is negative ~10%, I've saved money. If it's higher, then hopefully
there was a profit in having the item now rather than later or I lost
money.
In fact, that matrix is essentially the same. Borrowers win in
inflation (or might), while lenders might lose (but it beats leaving
the cash under the mattress where it will lose value). Borrowers lose
in deflation in most circumstances, while lenders win as long as
borrowers don't default too often. Lenders under deflation
have to be confident that the expected ROI of their loans will beat
the deflation rate, or they might as well leave the cash
alone. Lenders under inflation are virtually guaranteed that
reasonable loan practices (subprime mortgages being an example of
unreasonable loan practices) will be better than sitting on the
cash if the economy is otherwise stable.
> You want to borrow bit coins so that you can improve your business and then pay back the coins with increased profits due to the improvements.
That doesn't really answer the question. Grandparent wasn't asking "Why would you want to borrow BTC?". It was asking, "Why would you want to borrow in a deflationary currency such as BTC rather than a traditional, inflationary currency?"
As others have pointed out, the most obvious practical reason why a borrower might specifically desire a BTC-denominated loan is in order to short sell Bitcoin. For something like a business loan, it seems intuitive that choosing BTC over a traditional currency would accomplish little aside from maximizing the interest rate on your loan (in real terms). Admittedly there may be plenty of unwary buyers who'll happily enter into a loan like that without doing any math first - the entire payday/title loan industry is built on this fact - but an operation relying on that unfortunate fact doesn't jibe too well with the stated goal of behaving more ethically than the existing financial establishment. So hopefully there's something else to it?
Based on previous businesses that've offered Bitcoin loans, a common reason to borrow money in Bitcoins is because the person has no intention of paying off the loan. It doesn't take a large proportion of loans going bad before lenders start losing money on average at any reasonable interest rate, and increasing the interest rate will just increase the proportion of bad loans to good loans.
What legal or contractual constructs did previous bitcoin lenders attempt to use to ensure repayment? Surely they required some form of collateral or obtained sufficient information to be able to place a lien on the borrower's (thieves by your description) property.
The only thing I'm knowledgable about is disrupting corrupt, inefficient industries/governments. I will send you a note as soon as the API is ready. There will be an API endpoint you can use to send me bit coins.
You can do something similar to this on Bitfinex right now, though it's specifically lending for margin trading. Also has the option to lend USD, which I have done, and had quite a nice return.
No. Bitcoins are designed to act like cash, so he would need to ask for some kind of collateral to ensure that people don't just run off with his bitcoins.
Secondly, I know hardly anything about bitcoins - but here all I see is an arbitrage opportunity. Buy bitcoins from BTC-e and sell them on MTGox, which seems to be consistently around 150 (I assume USD) different.
withdrawing USD from mtgox and transferring them to btc-e takes roughly two hours, depending on which payment processor you choose. okpay is usually pretty fast, but you loose about 50$ on commission. furthermore unless you are verified on mtgox, you've got a withdrawal limit of 1000$ per day. add to that the time interval during which your money is locked up either in the blockchain or the payment processor and you end up with substantial risk between the trades.
The fact that there is a gap that large between exchanges is indicative of a huge liquidity problem in the exchanges. Big enough that I wouldn't go near it...even with my arbitrage-loving mitts.
People have said they're nearly insolvent. They're also being sued I think. So, withdrawing USD from Mt. Gox you're screwed... I waited 3 months and gave, up, converted my dollars into bitcoin and sold it elsewhere.
I want all time history! But on serious note, if you could dynamically add other "indexes" as well as show other currencies besides USD, that'd also be good. But I'm assuming this is a side project you're just messing with?
- Say I have 11 BTC on Coinbase.
Wire $10k to OKPAY ($25 bank fee, 0% OKPAY commission)
Send OKPAY money to BTC-E, $200 fee (2%).
- Now I have $9,775 on BTC-E.
Within ~1 second of each other, I enter a market order to buy 10.754 BTC on BTC-e for $9,775, and sell 10.754 BTC on Coinbase for $10,488.21 (after their 1% fee).
These are the real market rates at the time of this post (accounting for book depth). I make $488 with no risk other than holding the Bitcoin for awhile, which anyone holding Bitcoin does anyway.
Before I attempt to do this and find out the hard way why it ends up costing me money in the process, could someone please kindly point out the flaw in my plan?