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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.

#81

Post by justincormack »

nirvana wrote: post #49
bluena wrote: post #45

Earlier quoted context omitted.

agreed. buying gold is risky. instead puting it in a 2% account would be wiser.

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.

No you are talking about different ways you could speculate to fund a startup. Thats not arbitrage.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#82

Post by wisty »

nirvana wrote: post #56
fuzzythinker wrote: post #52

Earlier 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…

Once again, you say:

> 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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#83

Post by Retric »

nirvana wrote: post #54
klochner wrote: post #48

Earlier quoted context omitted.

so by your definition, any leveraged investment is arbitrage.

I, in fact, did not say that, making this a non-sequitor.

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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#84

Post by mynameishere »

decklin wrote: post #16

Is 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.

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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#85

Post by feral »

nirvana wrote: post #46
feral wrote: post #41

Earlier 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.

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…

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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#86

Post by feral »

nirvana wrote: post #59
barrkel wrote: post #55

Earlier quoted context omitted.

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 (Where price of money is a synonym for interest rate.)

Exactly. I'm guessing people have trouble seeing money as a commodity that can be arbitraged.

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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#87

Post by astrofinch »

"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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#89

Post by usaar333 »

nirvana wrote: post #35

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…

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.

Re: Don't try this at home. How credit card arbitrage funded my first company.

#90

Post by usaar333 »

msutherl wrote: post #80

One 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.

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.
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