3. The issuer does not want to risk having to default on a USD loan, and makes the assumption bitcoin can drop to 0.01.  If he borrows $10k and buys 2000BTC@$5.  A week later BTCs drop to 0.01, his 2200 BTC (1 week @ 10%) can now be sold for $22, and he has a deficit of $9978, assuming no interest on the USD loan.  Now, there are a lot of people who are already taking the risk that bitcoin will not fall, and he gives them a chance to put their money to work.  He pays slightly better than the going rate of lending and can still turn a profit.  The above average rate is justified by his admittance of exposure to a large, quick upmove.  If you want to break pirate, spend enough USD to make us all rich .  Until then, quit with the FUD.

You are quite welcome. These facts are well known to bitcoin lenders. I will even save you the scolding for banishing yourself from the bitcointalk forums. 

Lending bitcoins is quite a profitable business. There are a number of big lenders who have distinguished themselves and are doing quite well.

Good thing most of the forum has you on ignore.

I do a little lending, and selling.  Most of the last six months I have been making 10% to 15% per month.  My borrowers have been willing counter-parties and buyers similarly willing to pay (sometimes) $1/BTC above market rates.  Why, because there are other fees/costs that make this affordable.

I must be doing something right because demand has remained strong and my rate of defaults is quite low.  I even provide an on-call deposit service, much smaller than Pirate, and paying much lower rates, and you could say my guarantee to repay is worthless too if you wanted.

If you think the interest rates are wrong, I expect you have never lived in a high inflation or volatile economy, and are just very limited in life experience.  I still remember the days (in an OECD country) offering 22% deposit rates.

Maybe it's Alaskan King Crabs instead of MMM. http://en.wikipedia.org/wiki/Alaskan_king_crab_fishing

Is it a Derby or Quota? maybe both or neither.

I'm really not sure what's so hard to understand. His business requires holding on to a ton of bitcoins. It's more bitcoins then he's comfortable risking in his own portfolio. So he would want to offload that risk to people and share the profits with them. So it's a win-win situation.

So why does he prefer to borrow btc at such a high rate versus borrowing usd at a lower rate? notme answered it pretty well. Borrowing btc means he returns btc and borrowing usd means he returns usd. So there's no currency risk involved in holding the capital. (They is still currency risk involved if bitcoin price shoots up when he's trying to exchange usd back to bitcoins.)

Now think of it in reverse. If you had amazing business idea that can for sure make 10% a week on an almost unlimited amount of usd capital, would you want a usd loan that costs 5% a week? Or would you want a btc loan that costs 5% a month. Sure you would make a lot more with the btc loan. But what happens when btc prices shoots up to $30? You're left holding usd that you need to convert back to btc to return to your lenders. You would have to have increased your capital 6x in order to return that loan. Now that's a risky loan for the lenders!

So the smart thing for pirate to do is to take however many bitcoins he feels comfortable owning and put that into his business. As his business demands more bitcoins than he has, he should borrow the rest. It's true that he won't make as much from the bitcoins he borrows, but then he has no risk on them either.

I used to question why pirate would need to borrow so many bitcoins and not use his own. But now that I understand why, I believe that pirate's lending is legit and not a ponzi scheme. Well the only other thing is I think he may be paying too much (7% a week) to his lenders when most other people are only paying half as much. He could probably reduce it to 5% a week and still be able to get as many lenders as he needs. But maybe he is not greedy and want to share the wealth.

OK you have convinced me. Will launch FF+tor and set's up a proper anonymous identity (or use a previously prepared one), will borrow at 280% per year (or more) and will invest into MMM at 50%-60% per month. Looking forward to paying up interest up until the death of MMM, let us all pray it will last a few more years. But biz model is very sound. Once MMM fails will set up a new identity or ten and invest into MMM III. Rinse and repeat.

Disclaimer: no I am not going to do that, just kidding. But others will, I bet.

teflone will visit your house.

Well when I have done loans on the forum. The only 'collateral' I used was 'Trust' specifically using the WoT. I offered a rate on the forum far below what others charge. 1-3%/mo.  

If you don't pay back the loan, nothing happens to you from my stand point. But this is what happens because you didn't, you will have trouble getting other loans and other people borrowing rates will increase to counteract your bad debt.

So when people get mad at lenders like Patrick and others, they are misplacing their anger. It should be directed at the people that didn't payback their loans.

I don't bemoan others rates, especially for short term loans. Would I like to see rates come down? Sure. Will they? That depends on whether people payback the loans.

Coincidently, you can give Fiat(USD) loans with BTC as collateral if you wish. You could have a completely parallel market with BTC as an underlying security and no one would even have to know.

It is a truly unique concept that hasn't been around for a long time.

If you were running pirate's business, where would you go to mitigate exchange rate risk cost effectively?

As far as I know, they would all involve counterparty risk. How would pirate be feeling right now if he had used solely Bitcoinica to hedge? Pirate has absolutely no counterparty risk. Investors need to trust him. He doesn't need to trust anyone else to make good on an option contract.

Now, I'm not saying whether the avoidance of this counterparty risk is worth the amount pirate is paying. In fact, I have said before he could easily lower his rates and still get a good deal of funds.