Quote from: mjr on August 11, 2014, 07:05:53 PM

I'm sorry...I can't let this one sit here. Not because I think he is slandering a great institution, which he is, but rather that he is just so wrong on so many points. I appreciate people's ideas, but any idea should stand up to further scrutiny, this one clearly doesn't.

Here is one interesting thing which he failed to notice. IF the return is correlated to solely the risk of default of the exchange, then why would different currencies have different rates?

First off, the efficient market hypothesis was just that, a hypothesis. It has widely been viewed as a flawed model, and not actually practical in the real world. The whole purpose of markets is to discover what something is worth, if we already knew, we would never trade. But let's look at the numbers...

You pointed out that the USD return over 30 days was 2.79%. So, let us look at the BTC market. It's daily rate (according to Bitfinex.com) is 0.0055, and that works out (after their 15% fee) to .14% per 30 days.

So, as you astutely pointed out.
"After all, if the exchange suddenly defaults or disappears, then all money present on the platform might be gone as well. Since there is no counterparty risk on the traders due to the exchanges system, the full credit spread is caused by counterparty risk on the exchange itself."

So, an exchange with dollars in a bank account has a high chance of disappearing, and yet an exchange with bitcoin in its account, has a very low risk of disappearing. This seems to be pretty weird, given that they are indeed the same institution. If anything, one would imagine that bitcoin losses would be much harder to recover, but we could ask the Mt Gox customers to clarify.

So, two assets, lent by the same business, with widely different rates. It is almost as if the entirety of the rate is not explained by one cause. Perhaps there are other factors at play. Let's explore a bit.

Why would the USD rate be orders of magnitude higher than the BTC rate? Econ 101 says that prices are set by supply and demand, and based on the size of the market, it seems to fit. The USD market is much larger than the BTC market (30 million vs 2.5 million, roughly). Seems like a LOT of demand for USD, and what is that used for? To buy bitcoin. So it would seem that there are a lot of people who are bullish bitcoin, and very few people who are bearish. Perhaps that explains the big difference between the rates?

According to YOUR hypothesis, that rate=risk, if the risk carried by the lenders is ONLY a function of counterparty risk, the risk should be equal for BTC and USD. It is not, therefore I think your hypothesis is flawed.

I think that the market actually functions somewhat as follows. If you think that the price of bitcoin is going to be higher than $594, it makes a lot of sense to take out this loan. If you do not think the price will be higher than that over the next 30 days, it makes a lot of sense to offer this loan. Judging by the size of the markets, it seems a lot of people think the price will be higher than that in 30 days.

Lastly, IF there is a correlation between the risk undertaken by the lender, and the rate that they receive. It would, IMO, be relatively easy to tease that data out by looking at the interest rate on the lowest priced asset, the one in the least demand, and then figure that must be closest to the actual number. People lent that asset at that rate, and since any counterparty risk should be equal over all assets for one exchange, that rate would be, if you agree with his hypothesis, the one closest to the actual compensation for risk.

Okay, so on comparing BTC to USD this is not just different in terms of exposure, but also the BTC swap market on BFX is completely illiquid. The demand for BTC swaps is literally zero, and you only point out the best offer rate. The worst offer rate is 185 times higher (1%). The USD market is a lot more liquid, and the worst offer is no more than 1.07 times the best offer. This is liquid markets versus no market.

The rest of your story seems to focus on the efficient market hypothesis. Along with:

Quote

Perfect price requires two things - perfect information and infinite demand & supply.

I'm happy to find that the EMH is well known, but do note that these days it is not about perfect prices really. Maybe in the most strict form, but otherwise it allows for deviations around the true value. And free lunch still does not exist in economics - no return without risk and definitely not for long. For my conclusion to be awfully wrong, you are going to need to argue that there is a significant structural excess return on interest rates. Could markets be terrible inefficient when even Bitcoin hedge funds are entering the market (GABI), and there are no restrictions on money? There have definitely been some inefficiencies when looking at:

http://www.bfxdata.com/swaphistory/usd.php

But in support of my story, there are also clear pressures on the supply side. An argument such as demand is high so prices must be high will at best only apply for a short period of time. If you look at the graph, you can observe this easily. You can see some peaks in volume where rates also rise quickly, but as soon as they stabilize rates revert back. That's exactly what you would expect, because there is no reason to assume credit risk would suddenly change. The additional demand results in an excess return for the lenders, but when demand stabilizes lenders will keep taking advantage of this until the excess is gone. At that point, only the real risk compensation remains. Perhaps not exact, but not 20% off.

Quote from: 2dogs on August 11, 2014, 07:35:11 PM

Absolutely.
Previously discussed here:

https://bitcointalk.org/index.php?topic=667105.0
https://bitcointalk.org/index.php?topic=713722.0

Interesting, thanks!