Re: [OFFICIAL]Bitfinex.com first Bitcoin P2P lending platform for leverage trading
If US lending rates really go that low as 5-10% APR in the future, then it is not much incentives for people to lend rates here.
In which case people may very well stop lending until rates go up again, apparently lenders find these rates attractive enough for now. I'm curious as to how removal of the flash rates would affect rates though.
Obviously restoring the higher leverage levels would massively increase rate volatility.
What you might want to take into account is the opportunity costs. As a lender, the money you have at BFX are "stuck" there, compared to let's say an FX platform where you can trade any of the many, many pairs or CFDs. With BFX you have a binary choice: lend at the prevailing market rates or don't lend at all. As such, in the short term, the logical (and financially optimal strategy) is to always lend your money, even at very very low rates. 1$ pe day is better than no dollar at all.
Sure, some people will kid themselves that instead of lending at 0.05%/day it's better to wait for a few days and then lend at 0.2%/day. You do the math and see that you can wait up to 4 days without lending and you'll still do the same benefit (actually a bit less if you're compounding). But, that is speculation on the interest rate movement so an identical behavior to trading, and something that i would venture to assume lenders don't want to do as a principle (otherwise it makes more sense to just trade on margin with your funds).
Yes, in the long term, if rates drop dramatically, the lenders will pull out their money and move them somewhere else. But, for the money that are in BFX at any point in time, the optimal financial strategy is to lend them out at whatever rate you can. Thus the reason for "auto lend" option and the prevailing use of the Flash Rate rate to auto-lend the money on a recurring basis.
If you take all that i've said before into consideration, you will see why very low lending rates are possible and even probable, and such a situation can only improve/reverse if BFX takes active steps in limiting the minimum rate.
But i would worry less on the above and more on the fact that the lending cost is being hiked by 50% whenever desired....curious how many of the lenders did the math on that one. Not that it matters anyways
I feel we have some kind of fundamental problem though. With the lending rate approaching 20 % compounded interest a year we can see exactly why offering general insurance was not wise at all. People saw the (obviously not sustainable) compounded 3700 % to 248 % annual lending rate and with the insurance in mind started treating BFX lending as some kind of savings account. I wouldn't even wonder about people taking a classic bank loan to lend that money out at BFX. With every situation which seems too good to be true long term arbitrage will hit the market. Why would people pay 250 % interest a year if you can get money basically for free at the classic liquidity markets at the moment. It will take huge bullish momentum to get the lending rate up and even then I think liquidity has increased so much because of the perceived attractiveness that the 1 % times are over for good.
I would much, much more prefer leverage back to 4, no insurance whatsoever for standard swaps and building up of a sufficient insurance fund for those who want to pay 30 % to insure their loan. That would feel like engaging in a total return swap and not like putting your money in a savings account. Let's see how many people were willing to lend out their money at 0.0842 % after one or two flash crashes in which they lose 10 % of their deposit.
The insurance was a bad idea. In a serious market you would have something like call liability for the traders which a hong kong magic internet money trading company would unfortuantely not be able to realize though.