I did this once when interest rates were above 1%. Currently risk-free interest rates are too low for this action to be worth it.
Don't try this at home. How credit card arbitrage funded my first company.
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Re: Don't try this at home. How credit card arbitrage funded my first company.
#72Earlier quoted context omitted.
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 currenc…
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…
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.
Re: Don't try this at home. How credit card arbitrage funded my first company.
#73> 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 ever…
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.
Re: Don't try this at home. How credit card arbitrage funded my first company.
#74Is this actually considered arbitrage? http://en.wikipedia.org/wiki/Arbitrage 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
Nowadays you can't buy $1 coins with credit cards at all. Those were the days...
Re: Don't try this at home. How credit card arbitrage funded my first company.
#75I 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.
Re: Don't try this at home. How credit card arbitrage funded my first company.
#76I 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 aut…
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.
Re: Don't try this at home. How credit card arbitrage funded my first company.
#77Back 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...
Re: Don't try this at home. How credit card arbitrage funded my first company.
#78Earlier quoted context omitted.
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…
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.
Re: Don't try this at home. How credit card arbitrage funded my first company.
#79Earlier quoted context omitted.
I don't think what you are talking about is arbitrage, either. You are talking about using interest free loans from credit cards in order to make a leveraged bet on the price of gold; that is not arbitrage. If gold decreases in price - and its close to record highs, however you want to intrepret that - you are taking a huge risk.
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.
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Re: Don't try this at home. How credit card arbitrage funded my first company.
#80One of my co-workers did this in the early 00's, but for the opposite reason: to pay off $50k off capital gains task. Worked quite well for him.