> For some personal background, I do come from a financially stable family. My parents could have covered the $16k to help me follow my dreams. But I didn't ask them (and neither did they offer). The financial pressure and responsibility of my startup was to be fully on my shoulders.
Even though he wasn't accepting money from his parents, he was implicitly using their financial security to shoulder this risk. If everything had really gone to hell, they would have helped him back on his feet. (Much like some banks could take huge risks knowing the government would probably bail them out, even if there wasn't an explicit agreement or exchange of money beforehand.) Other people, like maybe his friend, don't have such a financial safety net and so can't take on those kinds of risks.
Credit card debt is, in most states, entirely dischargable in bankruptcy. So while it would be unethical to take on all this debt specifically with the purposes of squandering it, the CC companies are extending you an unsecured loan. It's really not all that bad of an idea, provided you can survive a bankruptcy and a few years of exceptionally poor credit.
This is like saying no American ever takes a risk because there is unemployment benefits, free healthcare clinics, and homeless shelters.
In Jason's case, remember, shit did hit the fan and he couldn't pay his debt. Instead of running to his parents (or bankruptcy, for that matter) he scrounged for some consulting gigs and short-time jobs to pay it back.
Frankly, that part of the story is among the most inspiring, since in the middle of that, we started FlightCaster.
Back in the mid-2000s, when money-market accounts were paying around 5%, and there were a ton of promotional 0%-balance credit-card offers, people from fatwallet used to use the term "app-o-rama" for this trick of applying for a ton of 0%-balance credit cards all on one day, so that they'd all be approved before the credit score was updated. Then, there were ways to essentially extract the balance as a cash advance w/o it being coded as a cash advance. A few cards (like Citibank's) would let you do a "balance transfer" via a check made out to you, and then you could transfer that balance to others and repeat. The end result was that you could take out a quick $50k or so in credit, put it in a 5% money-market account, and pay it all back 12 months later when the 0%-rate intro promotion would be expiring, netting $2500 interest.
You could also start a business with the cash, but that's a bit higher-risk...
tl;dr: "And, so I raised my money through credit card arbitrage: $22k across 14 different cards. So, yeah. That's about it... For me, it worked out both terribly and perfectly. The terribly part is that our startup failed, and I never paid myself enough to pay the cards back. At the end of Openvote, I was saddled with all this credit card debt, plus opportunity cost loss from no salary, plus no job. It was a tough time."
It's a lesson in what not to do, as the author acknowledges. Though he seems sanguine enough and has got back up on his feet.
Then again, I think there are easier ways to learn it's not a good idea to rack up five figures of credit card debt on top of existing debt and no savings... but whatevs.
While the 4th credit card company he applies to has imperfect information about what his credit is (at that point) actually worth, it seems like all the deals are independent.
True credit card arbitrage, which is what helped me bootstrap, involves real accretion of money
In my case, it was playing the us mint. They sell 250 $1 coins for 250 with free shipping. Fidelity Amex card gives 2% cash back. So I would order tens of thousands of coins and use the coins to pay the credit card build. 1K roundtrip = $20, and it was pretty scalable. Nowadays there is a limit
I'm not sure when this took place, but prior to the credit market crash, you were able to get risk-free savings accounts at around 5% interest. As long as your credit-card rates were below 5%, I think you could call it arbitrage, though it's value is lost in this case since the startup was burning the cash, not just letting the arbitrage run its course and used the proceeds.
This wasn't a particularly uncommon scheme in the mid-2000's with easy credit and high savings rates. A rough calculation shows that with a zero-interest card (you could generally negotiate 0% cash-advance checks as well) and a 5% savings account, you could make in the ballpark of $450 over the course of a year per 10k borrowed. If you had good credit and could quickly get access to 100k, you'd be making a few thousand for a not much more than a days work + some short-term damage to your credit score, though at that time, credit scores didn't really mean all that much.
I actually did credit card arbitrage in one of my first startups. We discovered a niche market where online credit card transactions were charged exorbitant rates for low-volume, non-swipe monthly subscriptions. By taking on the risk ourselves we aggregated many smaller sites, and was able to become a merchant bank ourselves.
Of course not. In arbitrage you are both a buyer and seller. Real arbitrage would be, for instance:
1. Get a bank to loan you at 0 percent.
2. Buy something liquid.
3. Sell said something.
4. Loan the money to another bank at >0 percent. (ie, buy a CD.)
...it's still stupid, because if they caught on to your shenanigans, that zero would turn into 29.95% overnight and you'd lose a pile of money trying to unwind the mess. The unavoidable problem is step #2. Good luck buying anything except for treasury bills that don't immediately drop 5 percent or more in value the minute you purchase it.
I went for the opposite tack when I founded my startup - live with my parents and do all the coding myself - and I would highly, highly recommend that over the credit card approach. My startup also failed. I also felt it was well-worth it for the experience and skills gained. I also found I loved startups and want to get back into them again.
The difference is that when my startup failed, I had money in the bank, no debt, and no particular time limit for finding another source of income. And that gave me options, and options gave me negotiating power. I was able to turn down offers that I felt would be career dead-ends or wouldn't teach me much, and would've even been able to found another startup immediately if the right opportunity hadn't come up. Instead of working 6 months on boring consulting jobs, I was able to spend that 6 months taking a job that taught me things (which has turned into 2.5 years, because the job is still teaching me things).
This is crazy - crazy interesting and crazy nuts. The idea of arbitraging has always be fascinating to me. I've had an idea for currency arbitrage in the travel industry, but never done anything other than back of the envelope calculations. Feel free to take the idea:
Tour operators publish their prices for the upcoming year's trips. They publish them usually in one currency, sometimes in two, rarely in three. They're beholden to these prices because they publish brochures and distribute them to places like Flight Centre.
So what you do is become a wholesaler of a bunch of tour operators' trips (this is easy to aggregate, many have XML feeds that publish their inventory, including pricing & availability). Then you use real-time exchange rates to figure out which currency it's best to sell in to a customer and then buy the product from the operator using another currency.
For example, say the US & CAD dollars are at par when prices are published. If the US drops a lot compared to the CAD, you sell the trip to your customer in CAD but purchase the trip from the operator in US.
The beauty is that operators will pay you a commission (usually 20-25%) on top of whatever you gain from the currency arbitrage. There's some complexity in becoming a legal wholesaler and being able to accept multiple currencies etc.
At the very least it makes for some interesting math.
And then you get a client like me, who points out that the price in Euros in 10% cheaper than the price in AUD because of currency fluctuations in that period, and I would like to pay in Euros please.
The travel agency (in Australia) weren't able to do that for me, however - so it seems their agreement was in a single currency as well. I'm not sure how hard I could have pushed it, because the dates ended up not quite working anyway.
Ha, yes, but you'd be in the minority of travellers who think like that. But I know of tour operators who refuse to allow this. If you're an Aussie resident, you have to pay AUD. If you're in the EU, you have to pay in EUR etc.
Kudos for him knowing that he was using his CC to fund his startup. I made the mistake of not realizing that I was using my CC to fund my business - I was using them for food, rent, and other things.
A lot of 'regular' businesses fall into the trap of building a lot of short-term debt that isn't really obvious - owing their suppliers, owing their employees, and owing the tax man. When a small hiccup hurts their cash flow, the whole stack of cards comes crumbling down.
I tried this with my first startup. It worked, and my wife and I wound up with a nice little online magazine that did pretty well. Then I got cocky, I tried to do it again but wasn't as careful as the first time. Now I'm digging myself out from under $60k in CC debt. Now I live by 3 before 1, make 3 before you spend 1. We'll see how that works out.
I did exactly the same, except to get a contract outfit off the ground. I paid off about $60k in total (in GBP) over 10 years. I worked out that in total I made about 20% more than salaried people over the time. It definitely wasn't worth it.
Kevin Smith used a similar technique to fund his first movie (Clerks). Personally, I think funding a movie with this technique is WAY crazier than a startup.
In most other countries and with some cards the introductory low or zero interest rate is only on purchases and not on cash advances or withdrawls.
There are a few ways to get around that. You are probably breaking money laundering laws if you do, though - so, disclaimer.
Find a friend or family member who has a small store and merchant account, or setup your own merchant account in a company name, or put up an item on ebay with a buy it now. Create one or a number of fake products with realistic looking prices (some merchant terminals let you enter an arbitrary price).
Buy it with your new card and kick back the cash, minus the transaction fee.
You can then just keep bumping the balance to a new card when the introductory period is up - just pay the minimum payments (which are usually very low). Juggling to new cards with introductory rates is a lot better than applying for many cards at once. It just looks like you got sick of your last bank for poor service etc.
Generally everybody says you shouldn't start a start up on credit cards.
What he went for is the advanced version where you can get free money if you stack the cards correctly. It is difficult to do, but companies and financial investors do it pretty often.
I feel like this is one of those "how to rob a bank" lessons that you find sometimes from old-time thieves. It shows you how to do something to take advantage of the system, definitely a hacker thing to do, but at the same time its very dangerous and often unnecessary. More than one person is reading this article and thinking "hmm..."
I think this puts a lot of the "put the house on the line" risk back into startups. Say what you will about the time and effort starting a business takes, in this day and age of venture capital, it is almost stupid to get into that situation. Nonetheless, people have done crazier things, overextended themselves even thinner, and had no contingency plan, and become billionaires. Its all part of the game
Imagine he had $50k in the bank. So he didn't need to use the cards. He takes the $20k out of the bank at the beginning of the year, puts it into the startup, which fails within the year.
What's the difference between the two situations? In one, he spent however amount of time earning the $20k before he put it into the startup, in the other he spends however amount of time working off the credit card debt after the startup fails.
The real difference between these two is the interest rate on the credit cards, and that's about it. In both cases he has to work to earn the money he put into his startup, though it might be more painful to do it after failure than before.
[I think its amusing that this comment has been down voted. I wasn't disagreeing with the person I'm responding to, didn't say anything offensive, and offered a different way of looking at things that seemed to be missing.]
I don't get why everyone is hating on the author for his usage of credit cards. It's not the first time I've heard a story like this, and it's certainly not going to be the last.
I did something similar with an Amex card, and used it to bootstrap the development I couldn't perform myself. As long as you manage the risk and plan accordingly, it's not as bad of a play as it's made out to be.
Also, the author never said anything about bankruptcy, and he seems a man of his word. I didn't get the impression he was going to burn through the cash and then file bankruptcy if it didn't work. In fact, he didn't, and it didn't.
When you have a dream, and you believe in it, you do everything you can to make it work.
For a software startup it is perfectly possible to get off the ground with an outlay <$100 and some of your time. I really don't see the need for dramatic and totally silly strategies like these.
Using one hole to plug another never was a really good idea.
There's a difference between learning to code, and learning to code well enough to make something worth selling. If it were that easy, everyone in his situation would have done it already - but it's not.
I'm an amateur web dev and experimental iOS dev, but in the time it would take me to get good enough to build my ideas from scratch, I could've payed someone to build 5 of them.
Back when I graduated college in 2002 into the tech bust and kept getting credit card offers to "transfer my balances at zero interest for six months", I took a bunch of zero-interest cash advances and put them into the ING savings account yielding 3-4% at the time. I did it for between 6 months and a year and netted a few hundred bucks before closing them all out. I wouldn't recommend it because a) it was more headache than it was worth to keep track of payments, and b) who knows what it did to my credit score. It was definitely an arb, but probably not operationally worth it...
I worked with someone who financed a feature film on 67 credit cards. He didn't make his investment back at all, and had to disappear for awhile, as he was saddled with about $300,000 in credit card debt. But when the credit card companies did catch up with him, years later, he was able to settle his whole debt for about 30k.
Running from the credit card companies ruined his credit, of course, but I wonder if the author of the article would have gotten a better rate of return if he had just hid from the credit card companies, waiting for them to get desperate enough to settle.
The opportunity cost involved in "hiding" might make this a bad deal though. The author was involved in doing above-board consulting work and planning his next startup.
I would expect that taking legal employment under your own name makes you relatively findable. Worse, recruiting investors for a startup is likely to be much more difficult if they perform due diligence on you and discover that you have a history of running away from creditors.
Of course, even worse than that is that the author planned his moves carefully in advance. While running off when you owe too much money isn't the best move, planning to run away from your debts might well be prosecuted as fraud.
"My friends that deferred their startup dreams for high-paying consulting jobs got no closer to learning how to build a startup and, worse, became accustomed to the life that a high salary affords."
It seems to me that the simplest way to solve this problem is to keep a very close eye on your standard of living. Personally, I buy most of my food from the dollar store and think of my summer internship savings as a "bankroll" that I should gamble with carefully.
Maybe I'm missing something but how is this even arbitrage? If you were just putting the money into an interest bearing account and repaying before the interest rate kicked in then yes it would be arbitrage (if you could even beat the 3% fee) but that wasn't happening here.
The author was just taking the 0% rates and using them to fund his company which didn't work out. There was never a guaranteed upside to this which is what you would expect with arbitrage.
"Learn how to code so you don't need to hire programmers."
That's the hidden gem. Only do this if you enjoy programming, though, because it's hard work, especially in the beginning. Expect a year or two to get fluent, not a month or two.
But once you know how to program, you don't have to spend time finding scarce developer talent, you don't have to spend time communicating requirements et cetera, and most of all you don't have to pay them $X.
1. This isn't arbitrage. Arbitrage has a specific meaning (profiting from price disparities in the same item in different markets). This could be described as a carry trade, but it's mostly just an inconvenient way to get a business loan.
2. This isn't even correct. It claims that you can get your credit score for free, which is incorrect. When I notice one error, I suspect there are other errors.
I think you are talking about moving balances between cards, sometimes called floating. It might loosely be arbitrage if you use the cash back features to think of the value of a dollar spent on one card being less than the other. If 3% cash back, spending one dollar on the card really only costs 97% of one dollar, then pay it off with a normal 0% cash back card.
Wow... that takes balls. Getting 0% introductory rate credit cards, and taking a cash advance... and then putting the cash in a bank account that pays interest.
Of course, if the business fails - as it did in the author's case - then you're stuck with all of the debt and a broken credit record, but it's all about taking risks right?
As long as you have the ability to start earning quickly and are smart about it, you can get through that without breaking your credit record.
The key to dealing with credit cards is understanding the terms -- it's all written down in a little document that nobody reads. In particular, you need to understand precisely how each lender defines "default". "Default" == no more 0%.
Also, this guy had the business networking chops required to jump into consulting gigs immediately upon declaring failure. The exit strategy is essential.
I did something similar to this with a house that I needed to get out of quickly. I borrowed $52,000 over several cards and ended up using $40k. The $12k was used as a pool to make the automatic payments from. End result? The value of the home increased by $80k.
We're very fortunate in this country for a liberal bankruptcy law, at least for when it comes to taking this kind of risk.
Now, this kind of risk won't work as well in this economy. Credit cards have severely curtailed their introductory rates. However, in 2002-2007 I knew people who augmented their income multiple times by this same arbitage and putting the money in low risk investment vehicles. Once the intro rates were finished, they would pay back 100% and close the card, moving on to the next one.
The credit card reform act will make this more difficult in the future.
This isn't arbitrage but it's a good article anyway.
I did something similar about 5 years ago but with "investing" the money in HYIPs (high yield investment programs). I was woefully ignorant of how many of these are scams (99.999%) but managed to make a decent return and not lose my shirt.
I wouldn't recommend doing this to anyway. The risks are extremely high.
This is the second article I've read on HN in as many days from this blog that ends every post with "my new company $x is going to change how the world does $y"!
The title is also inaccurate linkbait.
I appreciate self-promotion as much as anyone, but I think this isn't the way to go about doing it.
Why did submitter take a cash advance? Typically, you can get 0% purchase APR. The correct course of action is to cash advance the minimal amount you need and pay for every purchase you make with your 0% cards. Would have saved this guy a few hundred dollars.
Setup an Adwords campaign say $0.25 CPC. Funnel the traffic to a page where you have Adsense ads paying $0.30 CPC. That's arbitrage for you. Not sure why you guys using gold and CDS as examples on HN.
You're forgetting something: click through rate. Unless it's somewhere above 90% (in which case you're one hell of a marketer -- or you're paying for the traffic), then you're essentially burning your money.
Find the credit cards affiliate program. Sign up to it, and use it. You might get for example $50 commission, for signing up to a 0% credit card, if you use your affiliate link.
The IRS has pretty high convenience fees if you use a credit card (~2%). In the higher interest early 00's, this might be worth it; today, not so much.
This isn't credit card arbitrage. Let me describe one idea for how Credit Card Arbitrage could work.
You take out a bunch of credit cards, as he describes. Preferably ones with zero interest for the first year, or 6 months. You extract as much cash from them as you can. You put a chunk of that cash in the bank to make minimum payments from, and then you put that cash into an asset that will return more over the next year than the cards will charge.
[EDIT TO ADD: Want to clear up some confusion. In order to arbitrage interest rates, you have to have whatever you buy return more than what you have to pay for the money. There's one factor that people often forget when thinking about interest rates, and that is inflation. Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period. Thus, something that is an inflation hedge is beneficial. This is why I talk about gold below, and later I talk about CDs and even stocks.]
I'd suggest buying gold, or gold miners, or if you're super sophisticated, options on solid gold mining companies. (each of these has increasing leverage to the price of gold.) But it doesn't have to be gold, it just has to be something that is a "no brainer" way to earn a positive return above the rate of the credit card interest.
This may be difficult, and in fact, it should be difficult, because if it were easy the credit card companies would do it instead of loaning the money to you.
Potentially, you could take the money from the credit card company and put it into a CD at the very same bank. This works only if you really have "no interest for one year". Buy a 9 month CD (or better yet a 10 month CD), and then when it matures, pay off the credit card, and you get the interest from the CD for free.
The thing that makes such arbitrage opportunities so valuable is that, because the asset you're buying returns more than the cost of your money, you can scale it up pretty much infinitely.
But this is where things get problematic if you don't cover your downside. When the Bank of Japan was lending money at nearly zero interest, many banks borrowed in japan, converted the money to other currencies, and then bought treasuries of other countries. This is called the carry trade.
In fact, I wish I could start up a bank right now. I'd love to borrow money from the Federal Reserve, which is loaning it out at almost nothing, and buy the best bonds (along with some protective put options) I could find on the market.
A company wants to borrow for capital expansion, it will pay a reasonable interest rate-- say %6. The Federal Reserve is loaning at something like %1. %5 profit, at the only risk of the bond (so protect it with a CDO.) It must be great to be a bank.
If you have a startup you need to fund, and you can get a CD the interest rates right now are about 1.15%. So, I think this doesn't work for arbitrage, because while you may have "zero percent interest" there are going to be some fees that will overwhelm that meager interest rate.
But, if you could get a CD that paid out %6, and could borrow at %1 (on the "zero interest" plans) then you'd only need $400,000 in credit card debt in order to raise $20,000 for your startup!
Realistically, credit card arbitrage doesn't really work too well. If you get something with a higher rate of return, and you use borrowed money to buy it, then that's really investing on margin and not really something you could call "arbitrage". I'm sure it works for some people doing startups.... but isn't really reproducible on a wide scale.
BY the way, if you want access to some of that federal reserve money at cheap rates, at least some brokers are passing it along to their margin customers. Then you can start looking for a solid high yielding company, borrow %50, effectively doubling your yield... don't forget to buy some put options to cover your long position in case it crashes.
However, once you factor in inflation -- which runs at or around 2% depending on the country you live in -- you are making no money at the end of the year.
No, as a borrower, inflation works to your advantage.
i.e. I borrow $1k at 0% for one year. I put the money in a 1 year CD paying 1% interest. At the end of the year, I pay back the loan with the CD's principal, and put the $10 interest in my pocket.
Even if inflation were 2% (or 10%, or 100%), I am still making money - no matter how deflated the value of the dollar is, I still have more dollars in my pocket than when I started.
I covered the idea of putting the money into a CD in my comment. Even if you get a CD that returns %6, you'd need $400k in debt to raise the $20k.
Maybe mentioning gold is "politically incorrect" and so I'm getting down votes and disagreement, when the gist of my comment was talking about different ways you could arbitrage to raise money for a startup.
Not to mention that he seemed to forget about the 3.5% or so transaction fee that is usually associated with the 0% loans. This makes most safe investments like CDs in today's rates a negative return.
I mentioned CDs in my article. Did you stop reading at the first mention of gold? Further, CDs are not a "safe investment" because the real rate of inflation (not CPI, but actual monetary inflation) is greater than the return of the CD, by quite a lot. Another risk of CDs is that the bank might fail. Since the FDIC hasn't been collecting reasonable premiums against this risk, and banks are failing left and right, the deficit is made up via inflation, which means, you get paid back in lower value dollars than you lost.
This is also what makes gold a relevant possibility for this type of arbitrage. Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate. So, even if there were no increasing interest in gold from investors (e.g.: no appreciation due to increased demand) you'd be arbitraging the delta between the exchange rates of the two currencies. Borrowing in dollars and buying gold.
This could be, as I mentioned, done between any two currencies. Or, in the case of CDs, which I mentioned in my original comment, within the same currency.
But I guess that since I mentioned gold it is Very Important for you lot to say that gold is risky, and that I'm obviously falling to "mention" those things that I, uh, er, mentioned.
> Since gold's supply is relatively fixed, as the dollar declines due to inflation, the gold price will appreciate.
You are assuming that gold is "safe". It's not. If gold dives right when you need to pay back the card, you will start paying massive rates on the card. Not cool. Not even gold bugs suggest gold is a safe "no brainer" 6 month investment - there is a chance it will fall.
Big call - that gold will appreciate. Some people think that since the P/E of gold is effectively infinite, gold should be worth essentially nothing. Now, I'm fairly bullish on gold at the moment, but it's not guaranteed to appreciate. As credit collapses, cold hard cash becomes valuable, as you need it to buy the distressed assets of former paper-millionaires, or to invest in a much less congested market, or buy old tires to repair the soles of your kids shoes, so you actually go into deflation. And the US can sell off gold reserves if it gets in trouble (though there are conspiracy theorists who say this has already happened), and that would hurt gold prices.
If you get $10,000 from zero-interest credit cards, and put it a 6 month term 2% / year deposit, you debt is $10,000 (really $9,000 after massive inflation), while you get back $10,100 (really $9,090). So you made $100 (really $90, with some crazy inflation sucking up your winnings). A free $100 is arbitrage.
And old (and very similar) scheme was "Check kiting" - you cash a check (possibly for a very large amount), then deposit the money in your savings account (or use it as an emergency loan). Before the first check clears, you cash another check, and use it to cover the first one. If you miss a beat, you go to jail.
Instead of arbitraging the interest rates, you could make a leveraged bet on gold, houses (they always go up, because they 'aint makin' any more land, you know, and the population keeps increasing), shares, options, pork bellies, or cans of sardines. But the danger is, that some wacky market dynamic will wipe out your position, leaving you with a credit card debt you can't repay. Maybe you are a great investor, and know how to pick winners (and cover your downside) but great investors don't often need to borrow a few thousand off a credit card.
Hmm, not sure why you and others respond so negatively on my comment. I am merely pointing out that your original reply did not account for the usual 3-3.5% transaction fee on these 0% loans. Your only mention of such fee may be the "could borrow at %1 (on the "zero interest" plans)", which isn't anywhere close the 3-3.5% that I see. So taking that into account, "safe" investments like CDs will actually give negative return.
Meta: Not only did I read your whole initial parent post, I had also not mentioned a single word about "gold". So I am really intrigued by your negative tone and accusation of me jumping on the "anti-gold argument" bandwangon. Btw, I really enjoy reading your HN posts. But that doesn't prevent me from pointing out flaws in your logic. If my original reply sounded like an attack, then I guess I should be more careful in my wordings.
You responded to someone attacking me for mentioning gold with "not only that, he..." EG: You agreed with him.
My original reply did account for the transaction fees in "pay no interest loans". I didn't use the same figure you did, but to pretend like I ignored it is wrong. If you had read my post, you would notice that I said that a "safe investment" like a CD would not give you a sufficient return at current CD rates, and so I talked about a hypothetical %6 CD.
Your original reply came as piling on, and since you didn't (and still haven't) recognized that I had addressed the issue you're bringing up, there's no way to distinguish you form the others who are jumping in and telling falsehoods about me based on their own financial ignorance.
I am quite dismayed that nobody has responded on the original point-- using arbitrage to finance your startup-- and instead people are trying to score points by attacking me as if this were reddit.
I'm already pretty hesitant to post to this site due to an expectation that I won't useful discussion in response. This is just convincing me more of it.... so, if you do enjoy reading my HN posts, know that I try my best when posting to avoid stepping on any of the land mines that will result in people attacking me, and I post as if I'm walking on eggshells. I thought that mentioning gold might be tolerated here, but I was wrong.
Maybe I should have been more clear. What you're arbitraging is two rates of return-- the interest rate of the loan, and the return of the investment. In more conventional arbitrage, you're buying a commodity at one price in one market and selling it at another price in another market at exactly the same time. Here you're doing that, only the commodity is money. (Gold is money.) You could substitute a foreign currency, or foreign bonds for gold in my example, just as easily.
In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I picked that example because greek bonds have a high rate of return. They're also debt... you're getting debt in one market and selling it in another.
Greek Bonds obviously have risk. All arbitrage has risks, and those risks can be huge. That the risk is huge doesn't make it any less arbitrage.
FWIW, I don't think gold is at a particularly high price. I think the dollar and other currencies, which have been long over valued, are a little less overvalued than they were. I don't price gold in dollars, I price dollars in gold.
You're missing the key point of arbitrage: its risk-free.
Say you borrow $100k at 0% for 1 year. You then buy (at $1734/oz) ~57oz of gold. Next year, you plan to sell it and pay off your $100k.
But you've taken a risk. If gold is only $1500/oz next year, you're going to lose ~$13k. Of course, if its $2000/oz, you're going to make a nice profit. You're speculating on the gold market. You could build a similar position with gold futures, for example.
Arbitrage would be if you could take that $100k, and immediate buy gold in USD, sell it in EUR, and then buy USD with those EUR and wind up with >$100k. Then you're not taking any risk, because you can set up all those transactions practically at the same time (and the markets are liquid enough you know the prices you'll be able to buy/sell at).
While the academic definition of arbitrage requires it to be risk-free, in practice there is always risk of some form.
If you're buying gold in SF for $100 and selling it in NYC for $101, you carry the risk that the price will move while you're executing the trade.
If you're doing the yen carry trade (borrowing yen, and lending dollars), you carry the currency risk.
If you're taking 0% credit card loans and buying CDs, you carry the default risk on the CDs (mitigated, of course, by the FDIC).
That said, I agree with your general point - buying gold with a 0% loan carries so much risk that it's really just a leveraged investment, not an arb opp.
You are assuming the person doing this has not also bought puts against the gold sufficient to cover the long position.
There is no such thing as "not taking any risk" or a "risk free" investment. The idea that arbitrage is without risk is, kinda amusing, if you think about it.
Even buying the put options I described to protect the position involves risk, though it does reduce the level of risk dramatically.
I'm afraid you don't understand the point of arbitrage, at all.
As others have said, by definition, an arbitrage is risk free (or, in practice, nearly risk free).
Buying extremely risky Greek Bonds, with borrowed USD, is just making a leveraged investment.
Considering the transaction costs you'll pay, as a small time buyer, and the various worked in charges, you will certainly be losing out, when the risk etc is factored in.
Its a bad way to fund your startup; its up there with buying lottery tickets, or playing roulette to make more money: might work out ok, sometimes, or even all the times you try it - but its a negative expectation thing to do.
The problem is you do not understand risk at all. You compare things with many orders of magnitude different risks as if they were equally risky. In fact, in my original post, I addressed the issue of risk, and mentioned hedging that risk using put options. Yet, you think that because you're not sophisticated enough, or didn't bother to actually read my post, you think you can spout off and accuse of saying things I did not say. In fact, you claim that I "don't understand the point of arbitrage, at all", on the basis that you are unable to price risk accurately, or do not understand the concept of hedging.
But hey, just keep on thinking that gold is very risky.... sucker.
You're claiming gold is not risky? You're like the cheap little ads plastered all over the back of magazines trying to sell you gold. If gold is such a sure bet, why are so many people so desperate to sell it to you?
You put words in my mouth and then you characterize me. This makes you consistent with the rest of the commentators. This is why you can't have good discussion on HN.
I don't think so. It's about the price of money. If you can buy money for rate a, and sell that money elsewhere for rate b, where a < b, then it's arbitrage on the price of money.
(Where price of money is a synonym for interest rate.)
Gold is not the same as USD. It is a different asset to USD, and carries different risks.
The Greek Bonds you mention, you also consider 'money'. Well, not all 'money' is the same. That's why you get paid more if you buy Greek bonds than if you buy German Bonds, to the same Euro value: risk premium.
Its not arbitrage if you are just being paid for taking on risk, by definition.
I wrote my post, presuming anyone who might follow such a strategy was sophisticated enough to understand what risk is. Risk can be hedged. Risk can also be calculated.
You're right that gold is not the same as USD. It is less risky.
You'd do well to not tell me what I believe about various asset classes, especially when it is clear you have not even read the original comment I made.
By definition, people engaging in arbitrage are being paid to take the risk that the arbitrage might fail. The idea that there is such a thing as a risk-free form of property is fallacious.
Thus your arbitrary demand that I be talking about something risk free is an impossible standard (and quite off the point... but then, maybe derailing the possibility of sophisticated financial discussion was your goal?)
I mentioned hedging risk, and everything else you've brought up in my original comment.
The problem is you assumed it even if you did not say it. The are basically two ways to do arbitrage one is to execute the trades fast enough that the prices are fixed. Or do a closed transaction where the underling commodity price is irrelevant and you make money even if the price spikes or drops. AKA buy a directive of a stock and short that same stock. You can still be bitten if one of the counter-party does not finish the transaction but at least on paper your safe.
PS: Get a loan at 0% interest, buy an option on gold at 1000$ and short gold at 1100$. Now most of the time things are priced in such a way that you will lose money on this trade however if people are selling the options to cheaply then you could execute this trade and be guaranteed to make money. Assuming the people that sell you the option don't default. Unfortunately, you can make money by selling options worth more than your capital so you come out ahead on average and if bad things happen you are ridiculously broke but effectively still at zero. Sort of like me making a billion dollar bet that the redskins don't go undefeated this year, it's easy for me to price those risks based on the idea I would only go broke in such a way it they seem really attractive even if they are next to worthless.
No, in point of fact, I said the opposite. It is a shame that HN has become a place where people don't bother to understand the point someone is making, lie about them, and then the person gets down voted to negative territory when they try to defend themselves.
Not a single response to my comment has been on the actual topic of this submission. Most of them have been frankly, dishonest, and the only thing I'm concluding from this is that this site is inhabited by people who are such financial neophytes that they think there's such a thing as a "riskless transaction".
So, no, you don't get to assert that I assumed something and then call me a liar when I point out that I didn't say it, especially in the face of me pointing out the difference between leverage investments or margin investments and arbitrage in the original comment, which is proof positive that I didn't say they were the same.
Or, well, you can do that, but you force me to conclude that this is not a place where intelligent discussion can take place.
"Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period."
Sorry, but on top of confusing leverage and arbitration (AKA arbitration works even if your not taking out a loan but you can use a loan's leverage to increase your return). Your also making the mistake that inflation is bad when you hold another asset. If you buy 1000$ worth of wood and you get significant inflation that wood is going to be worth more dollars not fewer dollars when you sell it. When you get a loan inflation is good and deflation is bad, when you give someone a loan inflation is bad and deflation is good.
PS: When you get a loan you are required to pay back X% more than than you borrowed but that percentage is normally independent of the inflation rate for some period of time. It's true that with CC they will adjust their rates based on inflation, but the only reason this could work is the rate is fixed for some period of time even if inflation changes.
You quote me saying the correct thing about inflation, then you provide an example that is consistent with what I said, and then you claim that I am ignorant.
All in a thread where I responded to someone who lied about what I said, and pointed out that I didn't say that at all, and in fact, I said the opposite.
But what I actually said does not matter to you, or others commenting here. You're dishonest, and a perfect example of why HN sucks for trying to have a worthwhile discussion.
"Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan." (This is Correct)
"This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but" (up to here everything is fine) "the monetary inflation rate over the time period." (This is literally true, but misses the point while inflation makes this easier not harder if inflation is meaningful your not doing arbitration.)
The point I am trying to make is if you have a 0 interest loan for 1 year and you buy a 1 year bond that pays 1% interest then great you have arbitrage. But, if you have that same loan buy a 2 year bond with a that pays 2% it's become speculation because the value of a 2 year bond in at 1 years is dependent on inflation and you either need to sell that bond at market rates or get a new loan. So, if inflation is important your not doing arbitration.
The point about gold is not accurate. Arbitrage means going long and short equivalent amounts of equivalent assets. So it's arbitrage if you borrow at 0%, and invest in a CD at, say, 1%. It's not arbitrage if you borrow on your card and invest in a non-dollar asset like gold, unless your credit card liabilities are also denominated in gold.
It's important to note that you can only get 0% on purchases. I did the same trick as submitter in my self-funding days: all expenses other than rent were deferred for a year. I paid them back once I raised funding (and had the company failed, could have covered it all with a few months salary at a paid job).
However, as the submitter mentioned, any cash advance, balance transfer, etc. typically incurs at least 3% interest and/or transfer fees which really hurts potential returns. I'd be amazed if you can find a way to buy any investment vehicle with a credit card, forcing you to use the 3+% cash advance.
When you further factor in the time it takes up cards and the low credit limits you'll likely get, this strategy probably won't be worth it.
Wow, you must really hate pg and patio11. They spill about everything openly. What attention whores, amirite?
These types of blog posts are merely confessionals with learning points attached that the confessor hopes the reader would find salient. You apparently didn't. And...?
Even though he wasn't accepting money from his parents, he was implicitly using their financial security to shoulder this risk. If everything had really gone to hell, they would have helped him back on his feet. (Much like some banks could take huge risks knowing the government would probably bail them out, even if there wasn't an explicit agreement or exchange of money beforehand.) Other people, like maybe his friend, don't have such a financial safety net and so can't take on those kinds of risks.