Saturday, May 5, 2012

The Bitcoin Stock Market - Miners and Pirates, Oh My!

As of this morning, there are 8.9 million Bitcoins in circulation with a combined value of over $45 million USD. It isn't exactly a secret that a good portion of those Bitcoins are held by speculators and investors hoping to see the currency gain traction and their Bitcoins appreciate in value. All that to say, there is a heck of a lot of money sitting idle and not being put to work. At least, that was the case until recently.

Non-Bitcoiners may not be aware of this, but there is a substantial secondary market where Bitcoins are being used to kickstart (heh) various community driven projects, mostly, at this point, with a view to further developing the infrastructure that overlays and streamlines the Bitcoin economy.

The GLobal Bitcoin Stock Exchange (GLBSE) is the primary site through which most of these transactions are occurring. To give you an appreciation of the size of this market, over 5600 BTC ($28,000 USD) in securities were traded on the exchange in the last 24 hours, equal to about 1/6th of the 24 hour volume on Mt.Gox.

The top five securities by total volume traded, measured in Bitcoins, all represent mining operations, which shouldn't come as a big surprise to anyone.

(Edit: I spoke too quickly here. Three of the top five are mining operations, one is a bank, and one is a trading bot. Thanks to one of the readers for picking this up.)

The larger mining operations are always looking to acquire more hardware, and there's no better way to do that then to sell stock in your operation. Things get interesting when you look at the next five securities. Four of those five are "Pirate Pass Through" bonds, which I'll explain...

There's this "bank" see, run by a mysterious individual going by the name of "pirateat40" (pirate at 40) who has been soliciting Bitcoin deposits to finance an even more mysterious business of sorts. There are various theories floating around as to the nature of this business, most of which fall into one of two categories: one, a massive (by Bitcoin standards) Ponzi scheme where the interest on earlier deposits is paid using later deposits, or two, pirateat40 actually sells Bitcoins for cash to various entities who are looking to acquire substantial amounts of the currency without leaving a paper trail, as would happen if they used a conventional exchange.

Six months into the scheme, and not a single interest payment from the Bitcoin Savings & Trust bank has been missed, yet the interest rates are enormously lucrative for anyone willing to take the chance. For example, a 2000 BTC deposit (~$10,000 USD) will earn 7% interest per week!  You heard (read) me. If you were lucky enough to be one of the earlier account holders, you could be pulling in enough interest on a 2000 BTC deposit to cover a mortgage on a decent sized home. Unfortunately, pirateat40 is not always accepting new deposits (lending some support to the "not a Ponzi scheme" theorists), which leads us back to GLBSE and the "Pirate Pass Through" bonds, a means for anyone to get in on the Bitcoin Savings & Trust action.

A "cartel" of some of the more well-known members of the community has established a series of bonds that pay out 1.28 BTC per bond after four weeks. Each issue of bonds (PPT.A, PPT.B, PPT.C, etc) is auctioned off on GLBSE and typically sells for between 1.06 and 1.09 BTC per bond, giving investors a very respectable 15 to 20% ROI. The money raised from the bond sales is deposited into the Bitcoin Savings & Trust, where the bond backers earn substantially more interest (as explained above) than is paid out to the bond holders. Should the Bitcoin Savings & Trust default on their interest payments, the whole scheme would fail, and the bond holders would be paid out only a fraction (25%) of the bond value. For the moment, however, everything is holding together.

Not surprisingly, given the ingenuity of Bitcoiners and the ease with which Bitcoins enable financial transactions, an issue of "Anti-Pirate" bonds was created, sort of a credit default swap for anyone looking to hedge the risk of depositing with Bitcoin Savings & Trust. Interestingly, after a week, not a single Anti-Pirate Bond was sold, and in the words of the bond's backer, the sale was "a spectacular failure."

By the looks of things, pirateat40 has earned a lot of trust in the community. The question remains, however: what the heck is he doing with all those Bitcoins?

In the meantime, you might want to look at some of the other offerings on the GLBSE which range from companies like ZipConf (claiming to be able to pay a 6% dividend) to Satoshi's Daemon, a racehorse whereby the horse's winnings are distributed to the shareholders. And if you don't feel comfortable making your own investment decisions, there's always the "Gamma Bitcoin Fund," where you can have your investments managed for you.

Of course, if those don't sound exciting enough, you could always take a chance with the pirate...

28 comments:

  1. And if that all doesn't seem like a fall down the rabbit hole, know that you can place a bet at an online "predictions market" on whether or not the U.S. Securities and Exchange Commission (SEC) will take any action against any of this: http://betsofbitco.in/item?id=334

    ReplyDelete
    Replies
    1. I think the SEC has bigger fish to fry. Nevertheless, Bitcoin has clearly opened up Pandora's Box. Can't wait to see how this plays out.

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    2. If the SEC chases after bitcoin, it only gives more credence to bitcoin as being some sort of functioning currency or commodity.

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  2. Could it be that investments in pirateat40 were all done by pirateat40 himself?

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  3. Scam. He'll pay out to lure more fish in then close the net and run. Oldest trick in the book.

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  4. Tygrr-Bot and Tygrr-Bank are not mining operations and are in the top 5.

    ReplyDelete
    Replies
    1. My apologies - big oversight on my part. I have added an edit to the article with the correction. Thanks!

      Delete
  5. Ponzi Scheme was my first thought, but then I asked the question:
    Who would pay over 7% interest a week on a Bitcoin loan and why?

    The answer an drug dealer on Silk Road. Bitcoin payments on Silk Road are escrowed for easily two weeks while the drugs are shipped by mail. Furthermore the margins on illegal drugs are high enough to justify the interest rate. The dealer can immediately sell the Bitcoins for cash, and pay his supplier. When the escrow Bitcoins come through the dealer then repays the loan. This also has the advantage of hedging against a drop in the price of Bitcoin. It is not the SEC that needs to be concenered here. It is the FBI and DEA.

    This is not a Ponzi Scheme, it is a way of financing the illegal trade in drugs. The old adage when investing applies here regardless of the underlying currency be it BTC, USD, EUR etc.: If something sounds too good to be true, it usually is. I voted no in the poll.

    ReplyDelete
    Replies
    1. This doesn't suffice as an explanation. If the returns really are so high that there's a leftover after 7% increase weekly, the operator quickly has arbitrarily large funds, even if he starts off with only a normal salary, loan or whatever.

      Money laundering also makes little sense, because the invested funds do not move sufficiently. There's no value in a pile of dirty coins re-used again and again.

      Occam's Razor: It's a Ponzi.

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  14. Pirateat40 is a legitimate ponzier!

    ReplyDelete
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  16. well, I think the whole idea of an exchange based in bitcoins is an exciting prospect I dont think glbse was done in the right manner. hence, their shut down. You cannot legitimately have a centralized exchange based in decentralized currency. a centralized exchange is illegitimate for purposes of bitcoin.

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