An Argument Against High Interest on HBD

There are numerous posts praising the decision to raise HBD interest to 12%; So, I decided to write a post about the problems with high interest.

I've studied financial history of several hundred companies. A common theme is that companies start taking on interest for expansion, acquisitions or whatever the CEO desires. Companies have a few bad quarters and have to borrow for day to day expenses. Suddenly, they are in a debt trap where their earnings can't cover the loans.

Extremely mighty companies like Sears, JC Penneys and thousands of others have succumbed to debt in recent years.

The companies falter and get taken over by the private equity firm that seduced the company into borrowing. So, I decided to write a perspective of HIVE from a skeptic who sees the high interest rate offered by HIVE. I adorned the post with images of a mighty pine tree with shallow roots that fell under its own weight in a recent storm.

A Skeptical View of HIVE

HIVE is a social media platform with tens of thousands of users who each have a single minded goal: They want to pull more money from the platform than they put in. The users in the platform earn rewards funded by the interest on the HIVE cryptocurrency.

HIVE is currently offering 12% interest in a desperate attempt to bring in money though its HBD offerings. HBD is an attempt to create a stable coin based on the HIVE crypto currency.

This second picture shows that this appeared to be a healthy tree. I believe it was a Blue Spruce.

While many users are proud of the fact that HBD is offering an extremely high interest rate, the financial markets as a whole assoiciate high interest rates with poor quality loans. A company with a grade A credit rating can borrow money at a low interest. Companies with a low rating (aka a junk bond) has to offer high interest rates in order to attract lenders.

The offering of a 12% interest rate on the the HBD line indicates to the financial world that HIVE witnesses view HIVE as junk bond.

The HIVE interest rate, of course, is different. The interest is used to fund the rewards.

The final image shows the top of the tree snowed under.

While the people using HIVE might see the high HBD as a sign of financial strength. The financial markets see the high interest as a sign of weakness.

I began my comment by noting that HIVE is a platform where most users are hoping to pull more money out of the platform than they put in. I am such a creature. I purchased $480 in HIVE. I hope to pull out thousands. The people who buy HBD are all hoping to pull out more than they put in.

Resources

HIVE Librarian has a wonderful page that lets people browse the HIVE, HP and HBD richlist. The richlist shows that there is a small number of accounts with huge amounts of HBD. I seriously dislike this imbalance.

@arcange produces weekly financial reports which show the increased HBD debt burden incurred by HIVE. He notes that our debt burden is still lower than many major corporations. But look at the huge number of corporations that have been brought low by debt.

The analysis that argues taking on more debt is based on an analysis of companies that have products to sell. The HIVE product is that get rewards from interest. We are giving out rewards for interest on money that we are borrowing against ourselves.

Variable Interest

I like variable interest rates. I could see value in having an HBD interest rate that goes up and down based on the dollar peg. A good scale might be something like

If the HBD was above $1.10; the interest rate would drop to zero

From $1.00 to $1.5 the price might be the prime rate which is current $3.25

From $0.95 to $1.00; it would be twice the prime rate.

From $0.90 to $0.95; it would beh three times prime

When it is below $0.90 the interest would jump up to a junk bond rate.

The Market Valuation site indicates that junk bonds rarely hit high rates like 12% in times of financial crisis.

Is HIVE in a state of such dire financial crisis that we need to charge higher than junk bond status to get people to touch our HBD product?

Distribution of Investment

The Richlist on Hive Librarian shows that the majority of HBD savings are held by only a very small number of accounts. Some of these may be system accounts. I really don't know.

I worry about the distribution of ownership. One way to achieve a better distribution of ownership would be to cap on the amount of HBD that could receive rewards. The richlist shows only 34 accounts with more than 10,000 HBD.

The problem with concentrated HBD is that a single whale accounts could swamp the market and disrupt both the HBD and HIVE markets with a single sale.

Poorly distributed HBD is a financial risk to the large accounts. An account with large HBD holdings is likely to find that the funds are not all that liquid. A single player who wants to sell a few thousand HBD will drop the price while trying to make the sale.

Getting People to Use HBD as Money.

IMHO, the long term goal should be to get people to use HBD as a currency and not simply as an investment tool.

HIVE should be the primary investment tool of the Hive-O-Sphere. A large number of companies have been destroyed by interest bearing vehicles. While the interest on HBD is interesting, I find it foolish to promote HBD as an investment vehicle.

While many users claim that the high interest rate of HBD as a sign of strength, I suspect the market at large sees the high interest rate as a sign of instability.

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