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Honestly if its listed as safe on Badbitcoin i would run the other way. They have a habit of picking some massive scams to claim are fine.
The main problem is that they're all about quantity and as a result not very transparent on how services are evaluated. If you want to cover ALL services I can imagine why they took this approach. I do more extensive reviews and that only results in two reviews per week at best - it takes a lot of time. Still I prefer that over potentially listing a site as safe and not being able to explain when things do go wrong. In the end you have to find some balance between quantity/quality I guess (knowing new scams pop up every day).
Before entering an investments. You must study first the background of which site you are going invest at. First you must know if is it trustworthy? I've studied and searched for the reviews of this site. Here
http://digiconomist.net/fraud-risk-assessment-mining-sweden
Yeah, its a fraud.
I think Mining Sweden also shows the importance of trying to standardize evaluations of services such as these. Badbitcoin put them on their safe list and I must admit I wasn't sure about listing them as a scam at first because they weren't as explicit (eg waiving around massive returns) as a typical one (when I did the review anyway). But then the flags started popping up on the checklist, and it became apparent that this was just another shady service.http://digiconomist.net/fraud-risk-assessment-mining-sweden
Yeah, its a fraud.
OP should include these questions:
" the company was registered in the UK? "
" The domain was registered in panama? "
" the company was registered in the UK? "
" The domain was registered in panama? "
The first one is in there
Companies House is definitely popular among scammers as they just don't check anything. 
I could have made the question more general regarding the quality of the public register, but almost half of the ones I examined have a registration in the UK anyway. Website setup tends to be more varied, although it will typically involve some high risk country. Will think about some possible implementation!It's an interesting tool. One thing I noticed is that it is possible to select both the yes and no options together for a
question. From a usability standpoint, you should ideally only be able to select yes (thumbs up) or no (thumbs down).
Other than that, I like it. If nothing else, it will make folks really take a good look at the companies they are putting
their hard earned bitcoin into.
question. From a usability standpoint, you should ideally only be able to select yes (thumbs up) or no (thumbs down).
Other than that, I like it. If nothing else, it will make folks really take a good look at the companies they are putting
their hard earned bitcoin into.
Thank you! I actually tried making it so that a yes/no would automatically forward (that would save a few clicks), but obviously no luck so far
I do need it like this for the first question. Multiple company types could apply (hope this is clear as well?). It's more a technical limitation, but this motivates me even more to get it done 
After recent events, there should be one question and one answer... The first question, pick either of the options, then a big red SCAM in bold type should pop up.
jk but not really - will check it out, ty OP
jk but not really - will check it out, ty OP
Haha! I try to make as many available as I can, so people don't even have to start answering questions at all!
I haven't completed the 19 steps yet, but as far as I can tell, there isn't any kind of statement or ToS that disallows butthurt people to complain about your tool if it ends up predicting incorrectly. Perhaps that is something worth taking a look into, since more and more people nowadays will do anything to makeup their lost capital and push the blame on other people.
I like the idea, though. Keep up the good work.
I like the idea, though. Keep up the good work.
That's actually a very good point. You need to have some kind of disclaimer in an obvious location so that
folks can't come back and blame you for their bad choices.
Indeed, excellent remark! I normally include a disclaimer in my regular assessments, but despite stressing the importance of ToS in the questions I forgot to add it to the tool
Thanks! 
It's an interesting tool. One thing I noticed is that it is possible to select both the yes and no options together for a
question. From a usability standpoint, you should ideally only be able to select yes (thumbs up) or no (thumbs down).
Other than that, I like it. If nothing else, it will make folks really take a good look at the companies they are putting
their hard earned bitcoin into.
question. From a usability standpoint, you should ideally only be able to select yes (thumbs up) or no (thumbs down).
Other than that, I like it. If nothing else, it will make folks really take a good look at the companies they are putting
their hard earned bitcoin into.
Thank you! I actually tried making it so that a yes/no would automatically forward (that would save a few clicks), but obviously no luck so far
I do need it like this for the first question. Multiple company types could apply (hope this is clear as well?). It's more a technical limitation, but this motivates me even more to get it done I haven't completed the 19 steps yet, but as far as I can tell, there isn't any kind of statement or ToS that disallows butthurt people to complain about your tool if it ends up predicting incorrectly. Perhaps that is something worth taking a look into, since more and more people nowadays will do anything to makeup their lost capital and push the blame on other people.
I like the idea, though. Keep up the good work.
I like the idea, though. Keep up the good work.
That's actually a very good point. You need to have some kind of disclaimer in an obvious location so that
folks can't come back and blame you for their bad choices.
Indeed, excellent remark! I normally include a disclaimer in my regular assessments, but despite stressing the importance of ToS in the questions I forgot to add it to the tool
Thanks! Hi all,
For the past two years I've been actively trying to expose cryptocurrency-related scams, and by now my blog is featuring nearly 50 extensive service assessments. These reports are standardized and comparable tests for the legitimacy of any service subjected to it. Over time these fraud risk assessments have also proven to be effective at identifying scams. For example, HashOcean, Topmine and Cldmine were all high up on the scam list. Since the assessments are rather extensive, the only obvious downside has always been the fact that new scams tend to appear faster than its possible to assess all of them.
To address the former, I launched my fraud assessment tool (FAT) about two weeks ago. This is a simplified questionnaire that features many items typically included in my assessments, and immediately provides feedback as well based on the input. In short, it helps anyone in doing a quick and dirty scam assessment on any (new) investment/cloud mining service.
The reason I'm posting this here is because I'm hoping to receive some feedback on this tool. Given the content on the board this seemed like the proper place to ask. I included a feedback field in the tool, but even though the tool has been used quite a few times, it hasn't really returned much feedback yet. Given that this was the first release of the tool, although based on significant experience, I really doubt it's perfect straight off the go.
Link to Fraud Assessment Tool
What I would like to know is whether all questions properly formulated, and how the tool is experienced overall. Are there any people here willing to have a look at this?
Kind regards,
Digiconomist
For the past two years I've been actively trying to expose cryptocurrency-related scams, and by now my blog is featuring nearly 50 extensive service assessments. These reports are standardized and comparable tests for the legitimacy of any service subjected to it. Over time these fraud risk assessments have also proven to be effective at identifying scams. For example, HashOcean, Topmine and Cldmine were all high up on the scam list. Since the assessments are rather extensive, the only obvious downside has always been the fact that new scams tend to appear faster than its possible to assess all of them.
To address the former, I launched my fraud assessment tool (FAT) about two weeks ago. This is a simplified questionnaire that features many items typically included in my assessments, and immediately provides feedback as well based on the input. In short, it helps anyone in doing a quick and dirty scam assessment on any (new) investment/cloud mining service.
The reason I'm posting this here is because I'm hoping to receive some feedback on this tool. Given the content on the board this seemed like the proper place to ask. I included a feedback field in the tool, but even though the tool has been used quite a few times, it hasn't really returned much feedback yet. Given that this was the first release of the tool, although based on significant experience, I really doubt it's perfect straight off the go.
Link to Fraud Assessment Tool
What I would like to know is whether all questions properly formulated, and how the tool is experienced overall. Are there any people here willing to have a look at this?
Kind regards,
Digiconomist
Interesting, not every scam tries to pull a double like this. First luring people in with phantom riches is common, running off with a poor excuse like "we've been hacked" is common as well, but this adds plain old abuse of desperation. Obvious advice; take your loss. If you invested, your money is gone. Stop hoping.
Yes! Eobot is definitely a Ponzi scheme to me. You better stay away from it. Take a look at these reviews:
http://digiconomist.net/fraud-risk-assessment-eobot
https://forum.gethashing.com/t/emc-eobot-mining-coin-scam-cjmapope-ran-with-the-money/4326
http://digiconomist.net/fraud-risk-assessment-eobot
https://forum.gethashing.com/t/emc-eobot-mining-coin-scam-cjmapope-ran-with-the-money/4326
OK I almost hate to do this because it will seem like im defending them lol Im not im defending good fact checking . First link to Digiconomist is IMHO one step up from the gossip page there I said it lol sue me I mean these guys rated Coinbaise a 60 and crypsty a 50 (should have been 10) regardless not a very good fact checking resource however even with that in mind they only had 4 flags yes it says 5 but they missed this so its 4 and really 3 because of flags they flagged btc and paypal? I dont know many in the btc world that take pay pal this should be a shining star not a flag.
Entity Name: EOBOT INC.
Entity Number: C3798295
Date Filed: 06/15/2015
Status: ACTIVE
Jurisdiction: CALIFORNIA
Entity Address: 340 S LEMON AVE STE 2282
Entity City, State, Zip: WALNUT CA 91789
Agent for Service of Process: LEGALINC CORPORATE SERVICES INC.
Agent Address: 4778 DEWEY DR
Agent City, State, Zip: FAIR OAKS CA 95628
On to the second link thats a person that scammed people and as far as i know has no connection with EoBot the company in fact i remember EoBot freezing his account after this....
Oh and for all you that claim its legit and not a scam by posting payouts PLEASE STOP everyscam has payouts,,,,,,, the ones in the begining are the only ones that make out I made money off of Bltslice ScriptCC and Scryptsy if you can get in at the begining and get out before the fall go for it its a dice roll no mater who you go with.
Is EoBOT a scam yes and no. They have a pool (legit) Cloud mining scam(1st you will never ROI) NEVER dont give me this 2 year crap your pissing in the wind you will never get your investment back. 2 reasons they have no mining equipment(not enough to run the service from) follow the addresses you will see that they get paid though Ant pool and Genesis mining lmao all they do is make up the price and fee and then buy hashing power on a real mining site.
Anyways thats my 2bitcoins on the matter lol
I did the assessment in Jan 2015. They registered their business in June. I'm just guilty of not updating Besides, this is just really weird behavior so I don't think I should anyway (that would be making it too easy for scams that simply update stuff I point out). Let them explain why they didn't have a business registration in the first place At least they're definitely not classic Ponzi, but there are more ways to run a scam. I didn't look into them recently, but they used to charge massive fees.
I also had a warning out on Cryptsy by the way since March 2014 (they ended up getting hacked in July 2014) and featured a note of this in the review. I do agree this wasn't sufficiently reflected in the review score. They're not intended as fraud assessments, so this is a bit tricky.
I included this website in one of my fraud risk assessments. One red flag concerning identity/address relates to what already has been stated above. The owner has multiple websites registered on different names in different countries (same server/email address).
Excerpt:
False identities are of course a big red flag, but it is not the only one. For example, the terms of use are extremely limited (just some generic statements) and evidently copied from elsewhere. More details can be found here.
Excerpt:
Quote
This address is related to six other domains:
pro-soccer.info
promociq.com
gitbet.com
betstrikes.com
koychev.com
prognozi.bg
These sites have mostly been registered under different owners, although the one that occurs most often is:
Tihomir Koychev/Ganev
Sofroniy Vrachanski 19 (Coфpoний Bpaчaнcки)
7500 Silistra (Cилиcтpa)
Bulgaria
pro-soccer.info
promociq.com
gitbet.com
betstrikes.com
koychev.com
prognozi.bg
These sites have mostly been registered under different owners, although the one that occurs most often is:
Tihomir Koychev/Ganev
Sofroniy Vrachanski 19 (Coфpoний Bpaчaнcки)
7500 Silistra (Cилиcтpa)
Bulgaria
False identities are of course a big red flag, but it is not the only one. For example, the terms of use are extremely limited (just some generic statements) and evidently copied from elsewhere. More details can be found here.
Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity).
Thats incorrect. You're ignoring maintenance fees which are function of exchange rate since electricity, hosting and usually hardware is still priced in fiat. Maintenance fees currently take up 50-90+% of the payouts on most legitimate contracts, so this is pretty darn crucial. If BTC falls below $200, all these contracts become worthless. If BTC goes ballistic, even cex.io contracts might make you a nice profit. AT least until difficulty catches up.
Quote
That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).
Again, you're assuming to know how much a contract will pay out. If you do not know what difficulty will be like 6 months from now and what the exchange rate will be, how do you know what the expected payout will be ?
You see cloudmining as a loan from the investor to the miner, I see it as the miner selling off a huge risk to the highest bidder.
I do not intend to pretend that I can perfectly value these contracts. In my methodology I take a very pessimistic scenario so that I'm sure that my expection would be below the mean expectation if there was a free market. If I'm still left with a huge ROI at inception after that then I know something is wrong, because a swap traded at the mean expectation has zero NPV. In all other cases, I just want to inform people of the possible scenarios of the product they are buying, because cloud mining companies sadly do not provide this level of transparency.
Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)
What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity). That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).Only cloud mining contracts demand upfront payments (that shifts the credit risk to the customer), so that justifies a discount (ROI greater than zero at inception). This is why cloud mining is a shady business in general, because a discount means that the company is getting a bad deal. So even legit cloud mining companies are either exploiting their customers, or running a very poor business..
It's a very interesting comment but cloudmining companies get money upfront, they can use this money to buy new hardware. If they were not open to customers and were just mining for themselves they would not be able to grow as much.
Cloudmining companies can take a fee to conduct the business which means they have a very low risk and can earn a lot without cheating.
Of course, I'm being very theoretical. I do not believe in market efficiency at that level (even more because the companies set the prices and not the market). Just trying to point out why at least 100%+ ROI p.a. at inception is a strong sign of trouble (and it's often not limited to that), while in theory it should be closer to zero than anything else. Important: this does not rule out a return over the lifetime of the contract; that can still be the case if prices go up and/or difficulty develops slower than anticipated (emphasis on the latter otherwise you are better off buying the currency), the main question is: are you paying a realistic price for a contract that allows you to speculate on that
Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)
What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity). That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).Only cloud mining contracts demand upfront payments (that shifts the credit risk to the customer), so that justifies a discount (ROI greater than zero at inception). This is why cloud mining is a shady business in general, because a discount means that the company is getting a bad deal. So even legit cloud mining companies are either exploiting their customers, or running a very poor business..
Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
One thing I missed in criteria in the OP (it might have been said already, didn't have the time yet to read the rest) is plausiblity check on the promised (and delivered) returns.
Ive deliberately ignored profitability for a few reasons already explained, but also because it doesnt really tell you much about if a service is a scam or not. A ponzi can arbitrarily set perceived profitability. Setting it for low profitability will make for a slow, longer lasting ponzi, setting it high will make it collapse faster, but its not even obvious to me which will earn the scammer most. So I dont want high prices to become a false indicator of legitimacy, nor penalize a legitimate service for having highly competitive price, nor give ammo to those that accuse legitimate mining services of being scams just because the contracts are no longer able to pay dividends.
That said, nice job on the website. I generally ignore all cloudmining "review" sites because they are simply a vehicle to push referrals. Its nice to see one that actually tries to tell the truth.
Well, it is one the main characteristics of Ponzi to offer high returns with little to no risk. The SEC lists the following items with regard to returns:
- High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.
- Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
And if you think about a Cloud Mining contract, then your only real risk is credit risk. Hence getting over 100%+ per annum makes zero sense. That´s because it is similar to a swap contract, which has zero NPV at inception, but with the credit risk being off balance due to the upfront payments. In other words, your primary source of income depends on the likeliness of default of the company involved.
But most genuine cloud mining companies cannot offer the required discount. That´s because they have the operational costs which are not relevant to the fair value of the contract. If you do include that, then the customer always has a superior investment strategy buying directly from an exchange and would never buy the contract. In other words, they would really need to stress their own position to offer any discount at all. Thus if it is genuine then you´ll typically pay too much.
From what I´ve seen so far, there is nothing in between a poor product and an unrealistic (Ponzi) product. I suppose that because most companies do not know how to accurately value their own product in the first place. I've contacted several of them, but not a single one includes expectations in the pricing of the product. You can fix the price, but not the hashrate, so how can you properly value your swap-like product if you do not have an opinion on expected future cash flows?? Fortunately for them, their customers cannot do this assessment either. But this is also what causes the huge gaps between a "normal" and a "ponzi" product. A genuine business intuitively sets the discount too low, while a ponzi schemer does not care and offers an arbitrarily large one.
Nevertheless, it is still only an indicator as scammers might choose to simply offer a competitive rate (meaning: still a rather poor product) in a market that is not properly understood. So overall, I can agree to leaving it out to a certain extend, although I do think that it is a pretty strong indicator in the current environment (perhaps just more difficult to understand).
Having written all this, I would like to end with a compliment for how this assessment has been set up. In the end, it's not like the final verdict for the concerned cloud mining companies is miles apart. So at the very least, the criteria already used seem quite good.
Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
One thing I missed in criteria in the OP (it might have been said already, didn't have the time yet to read the rest) is plausiblity check on the promised (and delivered) returns. I've done some cloudmining (product) reviews in which I mainly focus on the returns, and based on that I dare to draw even stronger conclusions than the OP did (for two companies).
CoIntellect and ltcgear are both listed as "(very) suspicious". For these two, their product offers are truly absurd.
For LTCGear (full review) I determined that they offer the equivalent of at least 30% ROI per month (take a moment to consider how fast you'll be a millionaire if that holds), and for Cointellect (full review) I even found that they promise (and deliver) more mining income than mathematically possible.
And of course this makes sense for a Ponzi scheme. After all, it is required to attract not only new users, but also keep drop-off rates low and reinvestment rates high. In order to achieve that, the outlook needs to be better than anything else. Hence excessive returns should be one of the criteria. Certainly not the only one by the way, I limit myself to this because I'm reviewing products - not exposing scams (well I end up doing that for some, but that's not the goal).
CoIntellect and ltcgear are both listed as "(very) suspicious". For these two, their product offers are truly absurd.
For LTCGear (full review) I determined that they offer the equivalent of at least 30% ROI per month (take a moment to consider how fast you'll be a millionaire if that holds), and for Cointellect (full review) I even found that they promise (and deliver) more mining income than mathematically possible.
And of course this makes sense for a Ponzi scheme. After all, it is required to attract not only new users, but also keep drop-off rates low and reinvestment rates high. In order to achieve that, the outlook needs to be better than anything else. Hence excessive returns should be one of the criteria. Certainly not the only one by the way, I limit myself to this because I'm reviewing products - not exposing scams (well I end up doing that for some, but that's not the goal).
Yesterday KnCMiner proudly mentioned my review of their Cloud Mining service on their official Twitter timeline: https://twitter.com/kncminer/status/516962581723250689 (backup: http://s18.postimg.org/infpdu5w9/knc.png)
Nothing special so far, but given the content I was totally caught by surprise. Earlier this month when their Cloud service was launched I had already written a review, and came to the conclusion that the service was ridiculously overpriced.
Three weeks later, they cut their costs per GH/s by 65%. So I wrote a new review which is the one KnCMiner now mentions. This time, I conclude that the price is now at a level where you might consider such a contract. At the same time, I conclude that initial clients at previous levels indeed got a ridicuously bad deal and that their excuse for that makes no sense. Based on this, let's say I wasn't expecting to be featured by them! Even the part the cut out isn't entirely positive!
To me it seems they are well underway to becoming the next Butterfly Labs. Can you still take this company seriously?
Nothing special so far, but given the content I was totally caught by surprise. Earlier this month when their Cloud service was launched I had already written a review, and came to the conclusion that the service was ridiculously overpriced.
Three weeks later, they cut their costs per GH/s by 65%. So I wrote a new review which is the one KnCMiner now mentions. This time, I conclude that the price is now at a level where you might consider such a contract. At the same time, I conclude that initial clients at previous levels indeed got a ridicuously bad deal and that their excuse for that makes no sense. Based on this, let's say I wasn't expecting to be featured by them! Even the part the cut out isn't entirely positive!
To me it seems they are well underway to becoming the next Butterfly Labs. Can you still take this company seriously?
Re: Caution advised when using Bitfinex - High default probability
To analyze Bitfinex bankruptcy risk...
Once must estimate how much money they are making relative to deposits...
And understand how they make most of their money (hint: trading against order flow).
Most defaults so far have occurred because of incompetency resulting in hacks as Xiaoxiao mentions, Mt.Gox of course being one of the best example.Once must estimate how much money they are making relative to deposits...
And understand how they make most of their money (hint: trading against order flow).
What can be said on BFX competency? Well, for example, they registered on the BVI, while there are well documented reasons why such a (tax haven) registration increases (credit) risks. Think of a lack of oversight and increased incentives of risky behavior (increased profit margins) among others.
This risk reflects in the lender rates, because whatever way you look at this it only includes market risk + credit risk + some noise. To the lender, the market risk is actually near zero given the margin stop out level. In extreme cases, Bitfinex has covered losses so far. So that leaves something that looks like a corporate bond; credit risk + some noise due to the nature of the actual product. To the lender, this noise results in a risk free return, that automatically has a minimizing effect. So then you would end up with mostly credit risk, for which it makes sense for the number to reflect a high value. It's only a quantification of the obvious.
Re: Caution advised when using Bitfinex - High default probability
The second is because the information to evaluate risk isn't available to majority of lenders. Thus the risk as perceived by 'the market' is meaningless. It's obviously riskier than government bonds, sure, but that only sets a very low floor.
Of course there is information available. It's not the first Bitcoin exchange, not the first BVI registered company and also not the first one that does not publish financial statements. There is more than sufficient general (macroeconomic) information on all of this. Also the firm specific information isn't a complete void, just think of system failures, reputation, flash crashes on the platform, etc. There are a ton of variables that relate to credit risk. And of course there are inefficiencies, but this does not make the rate 60-80 times higher than the risk free rate (1 month).Re: Caution advised when using Bitfinex - High default probability
pure FUD - you ever used bitfinex yourself?!
I would not let most of the current exchanges handle my money. Not just because of these numbers, but also because their compliance standards are low to begin with. If you are lucky you find a public proof of reserves audit, often by performed by non-professionals and leaving any governance unaudited. Making things even less transparent, Bitfinex for example is apparently registered on tax haven the BVI, the best way to operate under a cloak of secrecy - no wonder perceived credit risk is high! And then people wonder why Bitcoin is taking so long to go mainstream.Re: Caution advised when using Bitfinex - High default probability
Current interest rates are the proof that your theory is completely wrong. Unless dropping bitcoin prices drastically decrease default risk, which is absurd, because the reverse is true (margin call cascade risk).
That's probably actually true to some extend. Less valuable Bitcoins are less attractive to steal. But anyway, dropping rates typically do not cause less default risk. But models are typically not perfect either. But is it wrong if it is not completely accurate? Every economist alive will guarantee you that these rates are not without (significant) risks of losing it all or a large part of it. The derived risk was high and it still is, so this hasn't changed much at all.Re: Caution advised when using Bitfinex - High default probability
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.
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.
Absolutely.
Previously discussed here:
https://bitcointalk.org/index.php?topic=667105.0
https://bitcointalk.org/index.php?topic=713722.0
Previously discussed here:
https://bitcointalk.org/index.php?topic=667105.0
https://bitcointalk.org/index.php?topic=713722.0
Interesting, thanks!