This is a follow up to Stu Lustman’s two part
series on Bitcoin P2P lendingby
Chris Grundy of
Bitbond. Chris is an SEO Specialist, Bitcoin obsessive and avid
tech fan who has written for a variety of Online publications as
well as regularly contributing to the
Bitbond blog. You can follow him on
Twitteror connect with him on
LinkedIn. Any feedback is welcome and
encouraged.
Combining Forces -P2P lending and Bitcoin
P2P lending is having a stellar year. Indeed, the
Peer-to-Peer Finance Associationrevealed that a record-breaking
$792 million has been lent out through UK lending platforms in
2015 Q2.
Things in the U.S. look equally promising as Lending Club
announced successfully breaking through
$1.9 billion in originations in
Q2. Prosper reported an equally impressive quarter,
issuing $912.4 million in new
loans, a 147% increase year-over-year.
With the P2P industry in such good health, why should you be
interested in bitcoin based p2p lending?
Because bitcoin p2p lending allows you to do more with less as
you will see in the following paragraphs. But first, how does
bitcoin p2p lending work.
In short, bitcoin lending platforms can leverage the bitcoin
payment network to create a global marketplace for loans.
Importantly, most loans processed over these platforms are
denominated in US dollars in order to mitigate bitcoin currency
fluctuations.
This works by utilising an exchange rate pegged loan, which uses
the US dollar as the underlying base currency. Payments are
conducted in bitcoin only however, in order to reap the benefits of
the bitcoin payment network. For a more comprehensive overview you
can also read
Bitcoin P2P lending – a primer in 8
steps. Now that we have a basic grasp of how it works, let’s
have a look at the key advantages.
3 core advantages of bitcoin powered p2p lending
If you’re already seeing good results lending via established
p2p lending platforms, here are reasons why you still might want to
have a closer look at bitcoin powered p2p lending.
1. Diversify your portfolio globally
Credit risk is pro-cyclical. As shown by the graph below, in the
event of a recession such as the one in 2009, defaults on private
debt go up. When coupled with static nominal interest rates, this
results in a decreased effective return on your loan portfolio.
Investors on traditional p2p lending platforms are mostly
exposed to one country only, meaning that they cannot diversify
across different regions. With bitcoin based p2p lending, lenders
have the ability to invest in different parts of the world,
minimising risk from regional economic and political cycles.
Now, you might argue that events like the 2009 recession and
subsequent financial crisis were global and international
diversification would have made little difference to your ROI.
However, we can assume that stronger growth rates correlate with
better repayment rates on private sector debt. With this in mind it
is important to note, that emerging markets still had an average
growth rate of 2.3% in 2009, compared to the negative growth rates
experienced by most developed economies.
Therefore a portfolio diversified across emerging and developed
markets would likely have experienced a higher ROI, due to the
resulting higher repayment rates. This means the investors who
invest globally, may have been able to mitigate the effects of
the recession that hit regional investors so hard.
2. Get access to higher interest rates
Bitcoin’s global reach allows investors access to higher
interest rates. This is because borrowers from around the world
command higher rates than U.S. and UK applicants.
As can be seen from the graph below, international borrowers are
also accustomed to steep interest rates from banks, increasing the
willingness to pay more than their U.S. and UK counterparts on
cheaper p2p alternatives.
Looking at the risk/return ratio, it is important to understand
that all loans on p2p bitcoin and traditional platforms have passed
high quality standards to qualify for their application. The grade
each loan listing receives should be viewed in this context.
Finally, ROI should be the deciding factor for any investor to
engage on a platform. Lending Club returns on grade “B” loans, by
far the most popular, stand at
7.71%, with 10.79% as the largest
average ROI (according to LendingMemo).
In contrast, ROI on bitcoin lending platforms aims to be higher.
Bitbond’sexpected ROI for example lies between 10% to 13%.
Let’s take a look at
Stu’s portfolio report for Mayto
illustrate this point.
From the screenshot you can see bitcoin lending platforms can
provide substantially higher
monthly ROIsthan their traditional counterparts.
Consequently, early adopters like Stu and Marco from
Smart Bitcoin Investment, are being joined by
many others, as investors pour into the bitcoin lending space to
take advantage of these high-yield opportunities.
3. Pay lower fees as an investor and borrower
Using bitcoin makes sense on a practical level as well. Due to
the open-source nature of bitcoin as a technology and payment
network, bitcoin based p2p lending platforms are independent from
third parties like banks.
Bitcoin lending platforms like Bitbond offer lower fees than the
traditional p2p lenders. These potential savings for investors and
borrower are reflected in the table below.
Loan originator
Borrower fees
Lender fees
LendingClub
1.1-5% depending on credit
grade
1% on all amounts borrower
pays
Prosper
0.5-4.5% depending on credit
grade
1% annual servicing fee
FundingCircle
2-5% depending on loan term
1% annual servicing fee
Bitbond
0.5-3% depending on loan
term
0%
As can be seen, the p2p bitcoin lending platform, Bitbond,
offers the smallest fees for borrowers, and lending is completely
free.
Thus, we have established that p2p bitcoin lending is a viable
alternative to its traditional counterpart with substantial
benefits concerning risk, interest rates and fees. So what lending
platforms should you know about and how do they differ?
Key players in the bitcoin lending field
Bitbond – the small business loans platform
The Berlin-based p2p bitcoin lending platform raised $675k in
May 2015, bringing its total to just shy of $950k. The most recent
funding has been used to improve usability and introduce new
features for lenders.
Perhaps the most significant of these features for investors is
the AutoInvest tool, which signals Bitbond’s commitment to rival
the functionality of the established lending platforms.
Launched at Finovateearlier this
year, this tool provides investors with the opportunity to automate
the lending process in order to maximise yields and reduce effort
in asset allocation.
Usability has also been improved significantly. A screenshot of
Bitbond’s loan listings page is below, showing all the available
credit ratings, the country of residence, interest rates, the loan
denomination as well as the terms and outstanding amount.
Furthermore, the German p2p bitcoin lending platform
differentiates itself from its competitors by focusing on small
business owners. By allowing borrowers to connect their eBay and
PayPal accounts (among others), Bitbond gains an understanding of
the creditworthiness of the applicant.
Specifically, an online seller with a carefully guarded
reputation, large amounts of positive feedback and a good payments
history on PayPal is unlikely to act fraudulently.
For investors, the average nominal interest rate at Bitbond is
18.5% p.a., which should be considered attractive.
Bitbond prides itself on transparency, meaning that it is the
only one of the three bitcoin lending platforms which allows all
relevant data to be
downloaded in a csv file.
BTCJam – the leader in bitcoin personal and payday loans
The San Francisco based startup is the best capitalised of the
three discussed here. Nevertheless, things have changed since
Stu’s assessment in December, as
growth has slowed and their
competitors have gained
ground.
BTCJam still offers a great service however, providing a user
friendly Receivables/Payables calendar page. Here, investors can
get a good overview of upcoming repayments and plan their next
investments accordingly.
Interestingly, BTCJam has recently tied borrower interest rates
to credit scores and follows the example of Bitbond and traditional
p2p lenders by applying risk-based loan pricing. The higher the
credit score, the lower the interest rate. This represents another
shift by a bitcoin lending company to provide similar functionality
and UX to their traditional counterparts.
BTCJam has also played an important role in providing the legal
precedent for a defaulted bitcoin loan. In a ruling earlier this
year, a US judge ruled that a Kentucky man
must repay an overdue loanhe
acquired via BTCJam. This verdict sets a crucial judicial instance,
stating that overdue bitcoin loans are equal to overdue traditional
loans in the eyes of the law.
Lastly, BTCJam offers the ability to trade notes on a secondary
market, allowing investors to sell off portions of invested loans.
Beneficially, this can be done on the site itself without having to
revert to a separate market like FolioFN.
BitlendingClub – the follower in bitcoin personal and payday
loans
The third and final key player in the bitcoin lending space is
Illinois-based BitlendingClub. With $253k in funding, the startup
has recently introduced some intriguing features, one of which is a
loan voting system. On the platform, potential lenders are allowed
to vote, raising the best loan applications to the front-page and
attracting more lenders.
As can be seen from the screenshot, BitlendingClub employs a
wider spectrum of credit rating than the other two, giving
investors a more incremental overview of the potential risk
involved.
Interestingly, the platform operates a dutch-auction style
lending system, where borrowers submit a loan request and lenders
can make loan offers. The borrower can accept the lowest offers
which add up to the loan amount. All leftover offers are rejected
automatically.
Another feature which sets BitlendingClub apart is the
availability of key metrics on the homepage. These include the ROI,
APR and default rates among others. BitlendingClub, like BTCJam,
focuses on personal and payday loans, unlike Bitbond which
specialises in loans for small business owners.
The future of bitcoin lending
Bitcoin lending has a promising future. Especially in regions
like Latin America and Africa, which are underserved by the banking
system and subsequently offer huge potential for digital
currencies.
Mobile alternatives like
MPesa (in India) have already seen
widespread adoption with over 17 million reported users. The day to
day usage of digital or mobile currencies is significant because it
lowers the entry barrier for bitcoin adoption in the world’s
underserved regions.
For the
5 billion households with no bank
account or access to traditional banking servicessuch as loans,
this could result in a financial revolution, as previously unbanked
entrepreneurs and self-starters gain access to global working
capital.
This represents a huge opportunity for investors who will gain
access to so far unreachable regions and borrowers commanding
attractive interest rates. The shift is recognised by the
European Alternative Finance
Reportwhich sees online p2p lending as
“the beginning of a broad and long-term structural
change”.
These underserved regions are where the p2p bitcoin lending
industry will see its fastest growth, as the potential for bitcoin
adoption is tapped into by young African startups like
TagPesaand
Bitsoko. We are already seeing increasing demand from the
world’s unbanked countries.
In the short term, bitcoin lending platforms will continue to
benefit from enthusiastic early adopters, tech fans, entrepreneurs,
shrewd investors and those neglected by the current financial
system, as they in turn will benefit from bitcoin.
Bitcoin lending platforms offer an attractive alternative
Thus the bitcoin lending world has matured since
Stu’s last appraisal, and is
expanding its message globally. For the sake of balance however, it
is important to realise that P2P bitcoin lending is still in its
early stages with potential for improvement. One such area is
doubtless the credit scoring of international borrowers which needs
to be standardized and fed with more data.
What bitcoin technology enables is global, instant, cheap and
frictionless transactions. Similarly to an email, users can send
bitcoins to any location in the world and be sure of arrival in
seconds, avoiding transfer and exchange fees. As we have seen this
disruptive technology represents the next step in the evolution of
p2p lending marketplaces as it enables cross-border lending and
global diversification.
The first p2p lending platform
Zopastarted in 2005. Now with 10+ years in existence its
viability is undoubted. Bitcoin p2p lending is only 2.5 years
young. But the existing players are learning fast from their
established counterparts and will likely reach a comparable level
of sophistication faster.
The post
The State of the P2P Bitcoin Lending
Industryappeared first on
Lend Academy.