BITCON - Cryptocurrency. Is It a Global Deposit Interest Scam?

ggrant on 22/08/2017 - 09:35
Last edited 22/08/2017 - 09:39

Is Bitcoin simply a financial industry scam getting user's bank interest?

Typical trader example: Transfer your government guaranteed funds from an Aussie bank earning 3% interest. The funds arrive in an account, not your own, and you are given an effective IOU, or an electronic record of credit.

Q. Who exactly is recieving your funds and making interest on the total global bitcoin funds? Or alternatively lending it out for housing etc? Is this the main driver behind Bitcoin?

Users get zero% interest, and transfer their bank funds into an unsecured quite flakey ledger record, that they can lose, or can be stolen, or the company can just take if bankrupt.

Risk example: "Bitfinex, a Bitcoin exchange based out of Hong Kong reportedly lost nearly $72 million of its customers' Bitcoins." They gave tokens for when they can pay customers back. Whoohoo!

I would like fair comment on whether Bitcoins really is/is not a financial ripoff. Thus who is collecting interest on global users BC wallet funds? And in reality are bitcoins a very risky unsecured investment to be avoided.

Financial

Comments

  • quirki on 22/08/2017 - 09:59
    +18

    Wow, the level of misinformation here is appalling.

    Invest 5 minutes of your time to read up on what exactly is a bitcoin.

    Btw, Bitfinex fully paid customers back by redeeming 100% of their tokens. it's a pretty ingenious way of deferring an immediate liability, and is a great example of how an unfortunate event is managed well.

    • ggrant on 22/08/2017 - 10:15
      -1

      The main points were where does the users interest go. Who gets it. Is this why bitcoin companies are appearing frequenty. And how risky is this curency exchange.

      • EightImmortals on 22/08/2017 - 10:40
        +13

        What interest?
        AFAIK there is no interest…only fees from transferring/buying/selling etc? (Could be wrong though). Also don't forget that 'interest' is the reason the worlds economy is in the toilet. Check out the videos "Money as debt" and "The money masters" for a bit an overview on how the system works. The whole point of crypto is to bypass the sticky fingers of governments and banks who take a lot and don't give much back. To provide people a safe way of buying and selling in a decentralised way with as few middle-men as necessary.

        So there is no interest to get, but on the other hand, the banksters stand to lose some liquidity (eventually)which will effect their ability to crank money out of thin air and then charge you interest on it (see: fractional reserve lending). So you can understand why the 'system' doesn't like crypto. I suspect it will get it's grubby claws into it eventually though as fiat is about cactus and I don't think precious metals will be able to do the job they have traditionally done as a safe store of real wealth. The world will have to go to crypto in some form (at least that's what my tea-leaves tell me. :) )

      • Scrooge McDuck on 22/08/2017 - 11:36
        +9

        The main points were where does the users interest go. Who gets it.

        You have assumed that interest is intrinsically associated with any saving of a currency. That is false.

        You only receive interest at the liberty of a deposit taking institution, usually because they are able to invest your deposit at an even higher rate of return and earn a profit on the difference.

        For many Australian bank accounts, low or no interest is paid. In other countries, low or no interest is paid even to savings accounts.

        There are two main sources of return for any investment, income and appreciation. Just like gold (or other precious metals), the gains (or losses) made by holding cryptocurrencies come entirely from appreciation of the asset rather than income.

        If you can't comprehend the above, please ask the many millionaire early adopters of Bitcoin if it's a scam.

      • chriise on 22/08/2017 - 13:58
        +2

        currencies are traded on exchanges. you put up a sell order, i buy it. you get my $, i get your BTC… so my 'interest' that i would have earned on my $ is now going to you…. but that's one really strange take on the whole thing. Is it a scam if i buy gold???? where does my interest go?!

  • Baghern on 22/08/2017 - 10:14
    +3

    Of course its F**KEN risky… show me an "investment" that has growth/return above 5% that isn't risky… cryptocurrency has plenty of pot holes along its route.. but the rewards has been staggering

    • [Deactivated] on 22/08/2017 - 10:42
      +5

      My return has been over 2,000% the past two years.
      Have I made bad bets? Yes.
      Have I win big? (profanity) yes!
      Do I care about 3% interest? No.

      • kasp on 24/08/2017 - 05:43

        I see the sky rocketing price and I would have been filthy rich if I kept my coins. However I also remember it being damn near impossible to actually turn 20k of coins into cash. Took so much dicking around, sure it's easy with small amounts but look at the walls that appear with larger amounts at virtually all the exchanges.

        Also know someone who lost 700,000 dollars in the Mt Gox debacle. I would have lost my money as well if I did not cash out so there is that as well. I also would have lost my money with the btc-e shutdown.

        Take that as you may. I also find it worrying that you aren't actually exchanging for money but a token of what the money is worth which is worrying.

  • airal3rt on 22/08/2017 - 10:14
    +4

    Lol

  • ggrant on 22/08/2017 - 10:19

    So this financial market is driven by taking the interest from users funds right?
    That's the main source of profit for these alt currency businesses, correct or not?

    • EightImmortals on 22/08/2017 - 10:41

      'Not'?

      Can you let us in where you are getting that information from?

    • [Deactivated] on 22/08/2017 - 10:43
      +2

      What does interest have to do with anything?

      Do you get interest when you buy gold? Buy shares in a company? No and no.

    • Tech5 on 22/08/2017 - 11:06
      +1

      Not correct. The main source of profit is either them withholding certain "dividends"attached to the coin such as GAS or Bitcoin cash, or through transaction fees. Just like any other stock exchange

    • Gareth on 22/08/2017 - 16:25

      So if I take $1000 out of my bank account and stash it under my mattress - where does the interest go?

      Interest only exists when you store currency with a institution who uses that money and returns part of their profits as interest to you.

      The 'alt currency' people you're discussing have nothing to do with interest!

  • Tech5 on 22/08/2017 - 10:42
    +2

    If you own your own private key, then you own the "company", you own the bitcoin and you own the "account". There is no IOU unless you place it in a currency exchange. if it is in your own wallet, then the answer to your question, who is receiving the funds? The answer is YOU

    Your question regarding interest is like, who gets the interest when you own lego models. Well the person who you paid for the lego models. Who gets the interest when you buy potatoes. The person who you bought the potato off.

  • ggrant on 22/08/2017 - 11:11

    Thanks guys. I guess my main point that these crypto companies likely make their profit from having mass users funds in their own account is lost.
    It is obviously wrong or not important to ozbonites. Cool. Happy trails.

    • moph on 22/08/2017 - 11:32
      +7

      What companies are you actually referring to? Do you mean cryptocurrency exchanges? I believe their main profit source is from skimming a small fee from each transaction. Collecting interest from the funds held may be a source of income for them but it is certainly a very small component of the cryptocurrency economy.

    • EightImmortals on 22/08/2017 - 12:16
      +1

      Having your funds lost is a real but small concern, hence if you are looking at crypto then at this point in time you MUST also look into getting a hardware wallet so you can take your crypto off the exchange and keep it safely. Having an exchange hacked is a different concern than 'where does the interest go'. In that, you are correct, I don't care about the interest but I do care greatly about the security of deposit. (not that I have much as I only started buying a few weeks back).

    • Switchblade88 on 22/08/2017 - 14:22

      You seem to be implying that the hacked exchanges staged their own heists, in order to keep the coins they were holding for their customers.

      In that case, you misunderstand the nature of the blockchain: it is a PUBLIC ledger where anyone can check what is held in any bitcoin account, at any given time, since its inception. Therefore, any 'stolen' funds are still traceable through their transaction history. Privacy is a misunderstanding of the obscurity of the transaction data - just because you can't see who's name is the the account, doesn't mean you can't figure it out.

      An exchange would likely make more money by their (1-3%) trading fees, than they would by keeping their customer's coins. Therefore it is in their own interests to continue operating securely than risk a hack.

      • kasp on 24/08/2017 - 05:49

        The problem with bitcoin is also what some people love about it. The lack of regulation.

  • noshopping on 22/08/2017 - 11:54
    -1

    If people just realize how Bitcoin and (some) altcoins will ultimately fundamentally change the face of financial industry (worth trillions), they would be lapping up as many BTCs as possible.

    • kasp on 24/08/2017 - 05:50
      -1

      That's blockchain which can change the face of financial industries.

      Bitcoin I think and alt currencies will probably stay obscure for pretty much forever.

  • yk300 on 22/08/2017 - 12:06

    I think you need to draw a line between the exchange companies and the currency/the underlying technology.

    You first question BITCON but then start talking about Bitfinex, a HK exchange. This is like you taking AUD overseas, say Nigeria, and claiming their currency is a con and then questioning how the local guy/company who exchange money with you operates.

  • ronnknee on 22/08/2017 - 12:08

    Treat Bitcoins as shares that do not pay out dividends and it makes a bit more sense. People typically trade cryptocurrencies for capital gains which would be way more significant than a measley 3% at best. Leaving money in the bank to earn interest is probably the (or one of the) least return of investment strategy.

  • EightImmortals on 22/08/2017 - 12:17
    +1

    While we're on the topic how do some of you longer terms investors view the current surge/bubble? Just a temporary pump or will it continue?

    • Switchblade88 on 22/08/2017 - 14:14
      +1

      No idea if it's a bubble.

      Surging? Definitely, but whether it'll plateau or drop short-term is totally up to the free market. I think there is some catch-up from the pre- hardfork shenanigains where the market stayed low waiting for an outcome.

      Given that bitcoin mining is an electricity (and hence money) intensive effort, every coin has at least some intrinsic value to it. If a miner can't sell their coins for profit, they'll either hold onto them and restrict market liquidity, driving up the price, or switch their mining rigs to another coin with better profits, driving up mining fees.

      I'm wagering much more volatility coming up to the 2Mb fork, but I think BTC & BCH will both rise once that (decidedly political) argument is resolved.

      I'm investing to HODL!

      • EightImmortals on 22/08/2017 - 17:26

        Cheers, when is the 2HD fork happening?

  • Baghern on 22/08/2017 - 13:33
    +1

    To clarify, the exchanges are not like banks who hold your crypto currency and loan it out…

    They are more like Share trading platforms that hold your shares, they don't get anything from it, except when you trade, they get a %. There are other means yes, lets keep it simple.

  • owli on 22/08/2017 - 14:28

    ggrant have figured it out guys, might as well sell your scam coins to me for $1.

    • Switchblade88 on 22/08/2017 - 14:53
      +1

      It's a free market, we'll do as we please… I'll sell you my coins for $10k each.

      Tell you what, -just because- you're an OzBargainer, enter "OZCOIN" in my bank transfer and I'll give you 10% off that price!!

  • eclaw on 22/08/2017 - 16:50
    +1

    Think foreign exchange, you take your money out of your interest bearing account and swap it for USD.

    You now hold USD which does not earn interest unless it is invested or placed with another deposit taking institution.

    By that token, bitcoin is no different as it is simply another form of currency which, in your case, the exchange of one currency for another is not a form of investment - at least not in the strictest sense.

  • [Deactivated] on 22/08/2017 - 18:58
    +1

    bitcoin and ETH are no longer an investment there is tooo much volatility with both.
    i would avoid anyone who is keen to help you invest in them.

  • Rod77 on 23/08/2017 - 09:02
    +1

    Hi there, Bitcoin is just part of a growing market of digital assets, with a capitalization of 147 billion dollars. Of course there is risk and volatility, as in every emerging market (think Russia or Brazil in the early 2000's) but also high rewards. The fact is that blockchain technology, the engine behind Bitcoin, Ether and other digital coins will modify the economy as we know it. That is why central banks, governments, global companies and start-ups are really looking into it (just google the bipartisan initiative in the Australian parliament to hold Bitcoin as reserve). Send me a pm if interested - I'm giving a cryptocurrency trading workshop in September in Sydney.

  • BigBirdy on 23/08/2017 - 09:22
    +3

    Crypto currencies cost real money to create (computing hardware, electricity and time) so there is an intrinsic COST to produce, just like digging a hole in the ground has a cost. Is there an intrinsic value? Does the hole have an intrinsic value? Only if you want a hole. The value cryptos have is their ability to do what can't be done (or costs excessively) with more tranditional 'currencies' (incl cash, credit, PayPal, etc), which seems to be primarily in the criminal arena. Traditional govt and bank charges are relatively small (excluding tax which ultimately takes us back to criminal), and are often smaller than crypto trader charges, as well as not having that massive volatility.

    • ggrant on 23/08/2017 - 12:11

      Thanks. I'm considering this subject for the 1st time, so trying to get a wide perspective.

      No one has appreciated my point, that if a crypto business attracts say $10 billion of funds from their users' real world bank accounts, into their own bank account, of which funds must be available to payout to users 24/7, and pay no interest to their users, just giving them a sort of chit to hold.
      They will earn at say 3% $300 million p/a interest, just by holding users deposited cash.

      This is BIG money, and I thought it relevant, but I guess it's not?

      • Rod77 on 23/08/2017 - 12:58

        Ggrant, you are missing a point. Business holders of digital assets, say Bitcoin, will keep their funds in Bitcoin in their own wallets (think in a coin that has your name in it, and a password, so nobody but you can use it) since converting it into USD or other currency will affect its value. How? Well, if one Bitcoin costs 4,111 USD (as today's price) and you cash out that money, what happens if the same Bitcoin costs 4,500 that same night?

        You are right, if they park their funds into any currency they will be looking out for a 3% return per year. But, why would they if you could have a 25% return in one week? Remember that Bitcoin price was less than 2k six months ago.

        It is of course highly speculative, but to my understanding digital assets have the highest ROI at the moment. It doesnt make sense to prevent such gains using traditional banking systems.

      • moph on 23/08/2017 - 13:27

        Your point is being considered, but I don't think it's as relevant as you think it is

        Firstly, the exchanges must maintain enough reserve to allow users to cash out. So they can't actually earn much interest on the fiat currency they're holding, because they can't invest those funds in an interest bearing financial product for any length of time.

        Secondly the amounts that exchanges are holding would not be anything like $10 billion, and even if they were, they would be eclipsed by trading fees. Let's look at Bitfinex for an example - https://coinmarketcap.com/exchanges/volume/24-hour/
        This shows that the last 24hr volume for the BTC/USD trading pair on Bitfinex was USD$225,965,000.
        Bitfinex's trading fees are here: https://www.bitfinex.com/fees
        Let's pretend, for argument's sake, that the average trader on Bitfinex has made over $1M worth of trades and pays a 0.060% maker fee. Let's ignore the fact that for every maker there has to be a taker who will pay a much higher fee. So using 0.060% gives us a VERY conservative estimation of likely fees raised.
        0.060% of 225,965,000 is $135,579 which gives over $49M per year.

        So just on that one trading pair, using an estimate of fees which is probably 2-5x less than what they really take, they're making $49M per year. That means they're taking at least the amount you speculate per year without any risk to users funds, and they're not sitting on $10B in cash.

        As I posted below at least a couple of Chinese exchanges are using fiat held to generate interest, however I don't think this would be a major thing outside of China.

        Thirdly - the main point that people have disagreed with you on is "Is this the main driver behind Bitcoin?".
        No, it's quite simply not. The main driver behind Bitcoin is that it's an amazing revolutionary technology that has the potential to change everything, and it has already spawned a whole ecosystem of other tech based on the same idea but extending it in different directions. This is going to change the world. Some people saw that and invested, the value increased, and other people got on board because they saw it as a good bet financially and didn't want to miss out. Exchanges make money from that, of course, but they primarily do it from transaction fees rather than interest on fiat held, and the idea that this is in anyway important to the fundamental value of BTC is just wrong.

  • moph on 23/08/2017 - 12:45

    So somewhat bizarrely, OP may have been right about this, at least in the case of a couple of chinese exchanges: https://qz.com/1059179/huobi-and-okcoin-chinas-two-biggest-b…

    • Rod77 on 23/08/2017 - 13:06

      Not really different from idle funds in any bank, or better, say air points, or other loyalty points that are monetized and still not used or reclaimed by nobody. Even supperanuation idle funds are way bigger: 11 billion AUD.

  • HeWhoKnows on 23/08/2017 - 12:56

    Bitcoin is like gold. A viable, finite tradeable alternative the the worthless fiat paper currencies around today. Its a store of wealth and for some a way to make lots of money against paper currencies that are printed endlessly with no hard asset backing. Like gold bitcoin has nothing to do with interest. When the price goes up 3000% in a short space of time who cares about interest. And today there are plenty of ways to spend your bit coins and convert back to any currency. That is what is making them so valuable.
    When you buy bitcoins you are buying from someone else. Just like shares.

  • TheBilly on 23/08/2017 - 13:02

    Could somebody please explain this and as to whether my thought process is correct - I thought that Bit coin was a public ledger based currency where all trades were tracked and similarly there was only a finite amount of bit coin in circulation as it was mined through algorithms (i.e. the total market quantity cannot exceed a certain amount). Lately I have been hearing at work that people are earning ridiculous amounts of interest from Bit coin. Interest by it's general nature increases the "Money Supply" which based off the laws of supply and demand should decrease the currencies value due to this increase. It is not like paper currency where the reserve bank can just increase the money supply as needed. So where is this interest coming from?

    • Rod77 on 23/08/2017 - 13:10

      Rather than interest it the value increase, due to scarcity. The amount of Bitcoin is fixed. As awareness increases and people acquires it, so its value rises.

      • TheBilly on 23/08/2017 - 13:12

        Correct I agree - Value increase is much better than interest return. So what you are saying is there is currently no concept of earning interest from Bit coin? Maybe the people at work are using the wrong terminology to describe their returns?

        • Rod77 on 23/08/2017 - 13:15

          It's not yet regulated at that point, altough some hedge funds are moving in that direction to set up pools of different coins as to create somehow the equivalent of an ETF.

        • chriise on 23/08/2017 - 13:31

          your colleagues probably mean returns from price increases. but you could also lend out bitcoin on some exchanges, borrowers will pay back with interest after term finished.

        • TheBilly on 23/08/2017 - 14:31

          @chriise:

          What are the risks for something like this? and how do these exchanges obtain such high returns in comparison to say a conventional hedged fund or futures fund in the hard paper currency realm?

          I'm not being pessimistic, but it all seems so odd that if people are making 100% ROI in just a few short months, why would anybody even undertake conventional investing.

        • chriise on 23/08/2017 - 16:53

          @TheBilly: Exchanges are just a market for trade… they aren't paying out 100% ROI. Those sorts of returns will be from the rising price of your investments. Perhaps I buy gold today for $10, and next month the market (you) is willing to pay $20, so I choose to sell. This trade, between you and I, is conducted on an exchange - the same with any forex or traditional trade platform.

          Lending can also be done on an exchange, but that is me letting the market (you) borrow my gold for a fixed price, if you make higher returns while borrowing my gold then good for you. I believe the exchange may automatically liquidate your borrowed gold if the price drops below a certain point to ensure you can still return it to me at the promised price (I think you need to put up collateral to borrow). But different exchanges may have different rules… I've never looked too far into the Lending market.

    • moph on 23/08/2017 - 13:16

      There are lending markets where you can earn interest from loaning Bitcoin for people to margin trade with, however Bitcoin itself is deflationary and does not earn interest if you just hold it in a wallet.

      • TheBilly on 23/08/2017 - 14:29

        I believe this is what my colleagues were making reference to - Investing bit coin into a high return fund. The question is, what do these funds invest their money into? and how is there investment providing a greater return than conventional investment funds. For example one colleague was quoting 1% returns on initial investment DAILY. Also what are the risks?

        • moph on 23/08/2017 - 14:43
          +1

          The lending markets I'm referring to are based on crypto exchanges like Poloniex. The way it works is you lend your cryptocurrency out at a rate set by the market for a period of days, and borrowers use that to do margin trading with leverage on the exchange. 1% is high but not uncommon - http://www.polobot.net/ratehistory.

          This is not investing into a 'fund' - it's just lending to an individual trader who has less access to capital and a greater taste for risk than the lender.
          There do exist 'managed funds' in the crypto space and there will be many more popping up over the next months and years as platforms for creating abstract cryptofinancial assets are being created. See https://prism.exchange/ as an example. What are they investing in? A portfolio of other cryptocurrencies - there are now 1000s.

          Cryptocurrency investments are providing higher returns than conventional investments simply because this is a new technology that people are becoming interested in and putting money into. It has now reached a stage of maturity and awareness that big investment banks are becoming interested and are advising their clients on how to get in. So there has been a huge amount of institutional money flowing in over the last 6 months or so. The flip side of that sudden popularity is that bugs, hacks, scams, and pump and dump schemes are common, and because the assets are so volatile and some of the markets so illiquid, it only takes one bit of bad news to crash the value of a cryptocurrency. Just as you can become rich overnight, you could lose all of your money. It's great fun.

        • chriise on 23/08/2017 - 17:01
          +2

          As chidg mentions, the borrower is going to be a individual who believes they can make a higher return from day trading. You are not investing in funds. It is high risk as a lender - you are relying on the exchange to correctly liquidate the borrowers positions if they are at risk of not being able to pay you back. It wouldn't surprise me at all to hear that the market sometimes moves too quickly to do this.

        • TheBilly on 23/08/2017 - 17:03

          @chidg:

          Great Insight - Cheers !!

        • TheBilly on 23/08/2017 - 17:04

          @chriise:

          It will be interesting to see how this plays out in the future, given the speed of the market and lack of regulation. Even the futures market (high risk/reward) has liquidation points well before slumps in pricing - and likewise the risk is hedged anyway by equity.

        • chriise on 23/08/2017 - 17:10
          +1

          @TheBilly: I think the liquidation points are probably fairly well placed, the problem i think is volume… One large sell order could potentially fill LOTS of buy orders at lowering prices. There's an example of this on the GDAX exchange sometime in Jul/Aug… I guess this would be a problem that will 'fix itself' as with further adoption comes larger volume…?

          Edit: it was ETH in June
          https://www.cnbc.com/2017/06/22/ethereum-price-crash-10-cent…

          FYI, I have heard the exchange reimbursed lenders or margin traders that lost money on this crash.

  • Krizy on 24/08/2017 - 01:39
    +1

    It's not a scam, it's category of extremely volatile currencies. It's only an investment if you're speculating the currency will increase in value. Only buy in if you have the risk appetite and don't be fooled into thinking it's a useful currency or will necessarily give good average returns.

  • Krizy on 24/08/2017 - 01:59
    +1

    It's an interesting point OP, maybe post to a different forum.

  • Hirolol on 24/08/2017 - 07:13

    It's funny how people are answering OP's question yet he is still crying about nobody caring.

    Mate, are you actually reading what people are saying?

    Not sure if you will read this but, To answer your question, I think you are assuming the crypto exchanges have more money than they do.
    If everyone tried to cash in at the same time they would go bankrupt.
    I doubt most have enough money just sitting in a bank account to cover everyone.
    Some of the bigger exchanges have huge running costs for the servers and many staff to pay.

    As an individual I guess people don't really think about the "if the exchange has all our money can they earn interest on it?"
    Everyone is in it to make money while they can, maybe people are too focussed on their strategy of how to make big bucks?

    I don't understand why you are getting shitty that nobody really cares about it though. Big deal if they do it anyway. I would rather them have extra money for back up than see them go bankrupt and potentially lose our money.
    Everyone in the crypto game is taking a risk, and the exchange is taking the biggest risk out of everyone, and if it means they are making a few extra bucks on the side then so be it.

  • vicosads on 24/08/2017 - 08:00

    if interest was the game exchanges would have made massive losses due to the rise in btc value?

  • coolsteps on 05/08/2020 - 14:23

    nexo pays interest now

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