Topic: . - page 18. (Read 67488 times)

PatrickHarnett, I don't understand why it's unlikely that you would have taken those coins and invested with Pirate directly. For this round of PPT.A, your downside is exactly the same as if you deposited 846 btc with pirate and did compounding interest for 4 weeks. If pirate defaults, you lose 846 btc in both scenarios. But your upside is less with selling 3000 shares of PPT.A at 1.038. So no matter how you look at it, this round of PPT.A is strictly worse than just deposing most of the insurance fund with pirate.

If you don't agree with my analysis, then I'm willing to personally buy 3000 more shares of PPT.A at 1.038 from you. As long as you promise to give me 960 btc if pirate defaults.
You are effectively giving people a 33.7% interest rate, which is better than pirates 31% compounding rate.

There is an error, and most people do miss it.  

What you wrote was 2 * 0 = 1 * 0 and that does not prove 2 = 1.

Math can do a lot of things, including "proving" logical impossibilities. For example:

Let a = b.
Then a^2 = a*b.
Then 2a^2 = a^2 + a*b.
Then 2a^2 - 2ab = a^2 + ab - 2ab.
Consequently 2a^2 - 2ab = a^2 - ab.
Factoring, 2(a^2 - ab) = 1(a^2 - ab).
Divide by (a^2 - ab), and...
2 = 1

(There is (sort of) an error in the above, but most people miss it. See if you can guess it!)

More seriously, we are not questioning the financial viability of PPT assuming Pirate does not default, only the less-than-optimal profitability in comparison to directly investing 960 BTC. Essentially, if you have 100% guaranteed investment opportunities, one that pays 1% per week, and another that pays 2%, both make money, but the second is the better choice financially.

I like what you're doing here, and you have my kudos. (And you certainly started a trend.) Don't get me wrong, I think PPT has had a positive impact and I wouldn't want you to cease it. Some of us just like spending our Friday nights doing math.

In this round, for example, if they only invest 3000 BTC into Pirate and he defaults, they will only lose 960 - 113.95 = 846.05 BTC.
If they invest all 3113.95 BTC, and he defaults, they will lose the full 960 BTC.

Note that I'm not saying that investing that additional BTC with Pirate is a bad idea, I'm just pointing out that it is a rational possibility. Holding that 113.95 BTC outside of Pirate decreases their profits if Pirate pays, but decreases their losses if he defaults:


This acts effectively as a partial hedge against their own investment, decreasing variance. Think of it as a similar effect to taking a slight fee at a PPS pool in return for more reliable payouts. (Not a literal analogy, but it might help clarify.)

Sorry, I just assumed, since this is the PPT thread, that we were talking about PPT.
Mia culpa.



Please explain this. They believe in Pirate and want to maximize their profit, right? They are not risking the (1 + x) BTC / share, it's not their money. You are risking that money, they only risk the insurance.

Actually it was quite interesting to wake this morning and see where it had evolved to.  Even more interesting to hear people claim I/we were losing money when at a simple level the tangible coins flow out the other end into people's pockets.  (and perhaps envious that I wasn't around when someone decided to sell div shares at 1.0)

The overall point, is that if you only have a few coins, and do not have a BS&T account, there are a few ways of gaining access to high returns.  We have seen a growth in competing products, but these have taken five or six weeks to come to market, and at least one of them has folded before launch.  Some are backed by well known and reputable members of the forum, others not so well known, and a range of rates/features. 

Despite this, we have still sold 3000 PPT.A bonds this week, have 4000 coins in reserves, found a few places where we broke GLBSE, raised a lot of awareness, had some interesting announcements from Pirate, paid dividends, redeemed two rounds of bonds, and delivered some advantage to a lot of people (I think there were over 100 cleared bids yesterday - not sure how many individuals).

Tomorrow we pay another dividend 0.0289 BTC/share to 9000 shares so the recipients of those payments are not necessarily losing money on PPT. 

The PPT group. When they issued PPT.A, they put 960 BTC in the insurance fund. We are stating that it would have been more profitable to simply invest that 960 BTC in Pirate.


Investing the 960 BTC in Pirate instead of running PPT.A, not in addition to.


Less loss if BS&T defaults.

(Patrick, if you feel this discussion is OT, just say so and we'll stop.)

The assumption is that the loss is an opportunity cost that I would have invested those coins with BS&T.  On that assumption, there is a non-profit maximised result.

However, it is unlikely that I would have taken those coins and done that.  he others may have.  But we do have 4000 coins sitting idle earning no interest, so that is a cost (even if just an opportunity cost).

As has also been pointed out, there is an expected profit from the latest round that (according to Burt's calcs) delivers 221.339BTC that will translate into a dividend of 0.0246 BTC for each PPT.DIV share in four weeks time.  So while there has been an interesting page of math, the end result is a 2.46% return for the person that picked up some dividend shares for 1.0  (the next five dividends currently total 0.24 BTC).

So, while the math boffins are busy, would you like to work out how profitable or not this scheme is for someone simply holding dividend shares and not positing any of the 4000 coins of insurance funding?

Who is investing this 960 BTC?



Sure, but if Pirate defaults they will loose 960 to you, not to Pirate. If they invest the insurance to Pirate they'll loose 1920 since they promised to pay you 0.32 BTC / share.



You seem to assume they'll invest no more than one BTC / share. If they sell for more than 1 BTC / share, why wouldn't they invest it all?

1.28 / 1.31 does not take into consideration the lost opportunity cost of 960 btc sitting there doing nothing. So that's not the true break even cost. Because PPT would earn more if they took the 960 btc and invested directly with Pirate since they are risking to lose that anyways if pirate defaults.

Here's the algebra for calculating the true break-even with compounding:

Case 1 - Sell 1 share of PPT at 1+x (if sold at 1.038 then x=.038)
  no default: PPT makes x+.03 (.03 is the extra you get for compounding)
  default: PPT loses .32-x

Case 2 - Put .32-x btc with pirate
  no default: PPT makes (.32-x)*.31 = .0992-.31x
  default: PPT loses .32-x

So break-even is when the 2 "no default" cases are equal.

  x + .03 = .0992 - .31x
  1.31x = .0692
  x = .0692 / 1.31
  x = .05284427

For the compounding case, true break-even is 1.0528 btc per share.
Selling shares less than 1.0528 is a losing proposition for PPT.

Oh, we were discussing break-even in comparison to simply investing 960 BTC with Pirate, not general break-even for a non-default.

1.28 / 1.07^4

I'm a contrarian.

Hey guys, if it helps all your calculations and stuff, you can factor in that pirate isn't going to default anytime soon.

Trollface.jpg

I concur, albeit only if they are compounding interest, which may not be the case.


You are entirely correct - we're just trying to figure out if this particular round of bonds was profitable.


Can you show the math behind that break-even value?

If they invest all 3113.95 BTC and Pirate does not default, they will make 25% profit off 960 BTC held in insurance versus 31% if they simply invested 960 BTC in Pirate in the first place.

If doing compounding interest, the break-even value is 0.9765


As far as I know, they are not using your money for the insurance, they are using their own.

If they invest all the 3113.95 they will get 4081.75 in four weeks. That's 1.36 per bond. After buy-back, they will have made (1.36 - 1.28) * 3000 = 240 BTC.

In other words, they are risking 0.32 * 3000 = 960 BTC, and if Pirate don't default they gets 240 / 960 = 25 % profit.

Aren't you missing something? PPT didn't choose to sell the bonds as cheap as they did - they had probably hoped they would gain more in the initial bond auction. Therefore, they won't be making much of a profit for this round. It's about as simple as an eBay seller putting $100 items up for auction at a starting price of $1.

If doing compounding interest, the break-even value is 1.0528
In other words, if the average sale price of the bond is less than 1.0528, then PPT is losing money in that round.

Thanks for reminding me that if pirate defaults, PPT still earns the 113.95. I fixed it in my post above. Here it is again:


Yes, this only is true if pirate defaults within the first week. If pirate defaults after that, PPT will have made more money to cover their loses. In order to do a better apples to apples comparison, it's easier to use compounded interest in this scenario since then it doesn't matter when pirate defaults. 7% interest compounded for 4 weeks is about 31%.

If pirate doesn't default, pirate will payout 1.31 to PPT but PPT only pays 1.28 to bond holders, so PPT makes an addition .03 per share. That's only if no default.

Case 1 - Sell 3000 shares of PPT.A at 1.038
  no default: PPT makes 3000 * (.038 + .03) = 204
  default: PPT loses 960 - 114 = 846

Case 2 - Put 846 btc with pirate
  no default: PPT makes 846 * .31 = 262
  default: PPT loses 846

Difference is 262 - 204 = 58
So if you are do compounding interests, you only lose 58 bitcoins for this round.

I agree putting 1920 BTC with Pirate is financially more profitable than this round of PPT bonds in all cases, but I'm not sure how that's relevant - no investment needed to be made initially by any of them other than the 960 BTC in the PPT fund. (PPT.A is simply being reused, no 8 BTC asset creation fee)

More importantly, we're ignoring a few key aspects of this.

Assuming the 113.95 BTC above the 3000 BTC is not invested with Pirate and not earning any interest (unlikely), if Pirate defaults, they will lose 960 - 113.95 BTC = 846.05 BTC - but only if he defaults before the first payment.
If he defaults after the first payment, they will lose 960 - 113.95 - (.07 * 3000) = 636.05 BTC.
After the second payment, 960 - 113.95 - (.14 * 3000) = 426.05 BTC.
After the third payment, 960 - 113.95 - (.21 * 3000) = 216.05 BTC.

If he does not default, they will make 3113.95 - 3000 = 113.95 BTC

An investment of 960 BTC into Pirate would lose 960 BTC if Pirate defaults before the first payment.
960 - (.07 * 960) = 892.8 BTC loss if Pirate defaults after the first payment.
960 - (.14 * 960) = 825.6 BTC loss if Pirate defaults after the second payment.
960 - (.21 * 960) = 758.4 BTC loss if Pirate defaults after the third payment.
And finally a .28 * 960 = 268.8 BTC profit if Pirate does not default.

Effectively, the first usage of 960 BTC is better if Pirate defaults before all 4 payments, the second if he does not default. I'm not necessarily arguing for PPT's choice here, but it seems to me to have a similar effect to a partial hedge. They make less if Pirate pays out, but lose less if he defaults.