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Hi deweller. Yes, in the event that a borrower defaults we will use our own funds to repay you. Obviously, this requires you placing trust in TradeMore, but we

Hi deweller. Yes, in the event that a borrower defaults we will use our own funds to repay you. Obviously, this requires you placing trust in TradeMore, but we will work hard to win this trust. One option is to start lending a small amount through us so that you can see what using our service is like. Full disclosure: we do not return lender funds in certain 'force majeure' events, such as a number of exchanges being undermined or entering bankruptcy. Hence, your funds are more secure in your own wallet or, even better, within cold storage. But if you are interested in earning a modest return on your holdings you might want to give us a try.

lclarkmichalek 12y ago
So you are, in essence, guaranteeing every loan on your service (excluding the usual acts of god and stuff)? Assuming that all goes well, where does the extra 5% come from? As I understand it, the return on a loan is usually a function of the risk attached to it, and you seem to be saying that your loans are risk free...
- deweller 12y ago
  I would assume they are lending your BTC to traders for substantially more than the 5-10% rate that they are paying you. In exchange for taking the risk, they keep the profits.
  - notahacker 12y ago
    Wouldn't a trader who was so Bitcoin-savvy they could make returns well in excess of 5-10% whilst maintaining the full value of their loan in BTC on recognised exchanges be smart enough to borrow BTC on less onerous terms from a pure p2p exchange?
    - deweller 12y ago
      @notahacker - As I understand it, Trademore offers leveraged loans. This means you can trade with 2.5 times the amount of the amount of the loan. So, for example, you borrow 10 BTC at, say, 20% APR interest for 6 months. You have control over 25 BTC to trade with during that time. At the end of the 6 months, you pay back 11 BTC (10 BTC + 1 BTC interest). With 25 BTC to work with, you have the potential to gain (or lose) substantially more than the 1 BTC you paid for the privilege of using those 25 BTC during that time. This seems like a big risk to take for Trademore, but they must have some risk management algorithms worked out on their side.
    - sdouglas 12y ago
      Hi notahacker. It's not just the absolute size of the interest rate. It's also the volatility. Exchanges which offer margin trading have market-determined interest rates, which we have seen swing widely in the past. To be clear I think that market-determined rates are no bad thing, but I also think that there is room to offer a stable rate if you a have a low-risk subset of the overall pool of borrowers. To deweller's point - yes, we have risk management algorithms. These algorithms listen to the BTC/fiat exchange rate, and if this moves against the borrower so that the value of the loan could be compromised, we issue stop-loss trades to liquidate their fiat holdings and protect the value of the loan in BTC. This doesn't completely remove risk: there is a chance that liquidity drys up completely and in that case we would have to use some of our capital buffer.
    - notahacker 12y ago
      @dweller I understood the leverage aspect as requiring the borrower to deposit a margin of fiat currency in order to be entitled to borrow 2.5x that value in BTC, repayable with a >10% APR in BTC, which appears to be confirmed by sdouglas.[1] If it were the other way round and TradeMore were giving borrowers access to additional funds on top of lenders', then presumably the owners of those funds would also expect a return... @sdouglas As I understand it most other BTC borrowing is done at a fixed rather than floating interest rate, in which case I can't imagine why anyone would borrow from you except in those rare cases where liquidity dries up and they desperately need to borrow? Or why you'd want to lend only during low liquidity situations (or to incompetent borrowers) and only to borrowers whose trading position is exposed by that lack of liquidity? [1]As a footnote, if I were running a business with that model I'd be happiest if the BTC ecosystem crashed, in which case my BTC liabilities and all the defaulting BTC loans might be worth less than the nice juicy chunks of fiat. It would be like holding subprime mortgages if house prices massively and unexpectedly soared!
      - sdouglas 12y ago
        Hi notahacker, the initial margin deposit is in bitcoin (apologies if we did not make this clear) since lender funds are also in bitcoin. Regarding fixed/floating: if you are borrowing on an exchange such as Bitfinex then for any one currency swap the interest rate is fixed, but these swaps are typically short term and so when you come to refinance a position you could find yourself facing significantly higher rates than you had previously. Since (at least in the short term) our earnings will be all be in bitcoin, a collapse in the price of bitcoin would be very bad news for us.

lclarkmichalek 12y ago

So you are, in essence, guaranteeing every loan on your service (excluding the usual acts of god and stuff)? Assuming that all goes well, where does the extra 5% come from? As I understand it, the return on a loan is usually a function of the risk attached to it, and you seem to be saying that your loans are risk free...

deweller 12y ago
I would assume they are lending your BTC to traders for substantially more than the 5-10% rate that they are paying you. In exchange for taking the risk, they keep the profits.
- notahacker 12y ago
  Wouldn't a trader who was so Bitcoin-savvy they could make returns well in excess of 5-10% whilst maintaining the full value of their loan in BTC on recognised exchanges be smart enough to borrow BTC on less onerous terms from a pure p2p exchange?
  - deweller 12y ago
    @notahacker - As I understand it, Trademore offers leveraged loans. This means you can trade with 2.5 times the amount of the amount of the loan. So, for example, you borrow 10 BTC at, say, 20% APR interest for 6 months. You have control over 25 BTC to trade with during that time. At the end of the 6 months, you pay back 11 BTC (10 BTC + 1 BTC interest). With 25 BTC to work with, you have the potential to gain (or lose) substantially more than the 1 BTC you paid for the privilege of using those 25 BTC during that time. This seems like a big risk to take for Trademore, but they must have some risk management algorithms worked out on their side.
  - sdouglas 12y ago
    Hi notahacker. It's not just the absolute size of the interest rate. It's also the volatility. Exchanges which offer margin trading have market-determined interest rates, which we have seen swing widely in the past. To be clear I think that market-determined rates are no bad thing, but I also think that there is room to offer a stable rate if you a have a low-risk subset of the overall pool of borrowers. To deweller's point - yes, we have risk management algorithms. These algorithms listen to the BTC/fiat exchange rate, and if this moves against the borrower so that the value of the loan could be compromised, we issue stop-loss trades to liquidate their fiat holdings and protect the value of the loan in BTC. This doesn't completely remove risk: there is a chance that liquidity drys up completely and in that case we would have to use some of our capital buffer.
  - notahacker 12y ago
    @dweller I understood the leverage aspect as requiring the borrower to deposit a margin of fiat currency in order to be entitled to borrow 2.5x that value in BTC, repayable with a >10% APR in BTC, which appears to be confirmed by sdouglas.[1] If it were the other way round and TradeMore were giving borrowers access to additional funds on top of lenders', then presumably the owners of those funds would also expect a return... @sdouglas As I understand it most other BTC borrowing is done at a fixed rather than floating interest rate, in which case I can't imagine why anyone would borrow from you except in those rare cases where liquidity dries up and they desperately need to borrow? Or why you'd want to lend only during low liquidity situations (or to incompetent borrowers) and only to borrowers whose trading position is exposed by that lack of liquidity? [1]As a footnote, if I were running a business with that model I'd be happiest if the BTC ecosystem crashed, in which case my BTC liabilities and all the defaulting BTC loans might be worth less than the nice juicy chunks of fiat. It would be like holding subprime mortgages if house prices massively and unexpectedly soared!
    - sdouglas 12y ago
      Hi notahacker, the initial margin deposit is in bitcoin (apologies if we did not make this clear) since lender funds are also in bitcoin. Regarding fixed/floating: if you are borrowing on an exchange such as Bitfinex then for any one currency swap the interest rate is fixed, but these swaps are typically short term and so when you come to refinance a position you could find yourself facing significantly higher rates than you had previously. Since (at least in the short term) our earnings will be all be in bitcoin, a collapse in the price of bitcoin would be very bad news for us.