The BTC lending environment is growing, yet volatile. While there is cause for concern, the USD lending platforms had higher defaults their first couple years too. Now 5-7 years down the line, they have streamlined systems and consistent returns. The BTC lending platforms can get there as well.
The Current Environment
A fellow investor on BTCJam released some stats to Jam's Facebook group that showed a disturbing trend.
Disclaimer: To the best of my knowledge this is accurate but cannot be fully confirmed as Jam does not release this information to the public.
Here is that chart:
Defaults have actually increased in 2015 since their changes in credit grading and loan pricing. While all this information cannot be fully confirmed this is consistent with what I hear from other investors although my own default rate and repayment rate have stayed pretty consistent for the last 12 months.
This is what historical defaults look like at Jam below, courtesy of the great site BTCJam a la Zaibot.
This graph implies that the historical default rate is 5526 BTC on a total of 30,393 BTC lent or 18.18%, yet our 2015 YTD default percentage is 22%. This is something to watch as they try to standardize grading and pricing. Their default rates are the highest of the big 3 platforms, which is interesting since they are also the largest of the 3 in total volume and neck and neck with BLC in monthly transaction volume.
BitLendingClub is not much better although their Statistics page at least recognizes that defaults exist. June 2015 saw a skyrocket in defaults with A graded loans leading the way at 25.37% when you roll your cursor over the June numbers (on their page this chart isn't interactive) on the Late and Default Rate by Credit Grading chart as seen here:
Interestingly, July shows a much tighter grouping of defaults by loan grade with A, B and C loans defaulting at rates of 9.28%, 9.07% and 6.92% respectively. Some of the other differences of what BLC is trying to do with credit grading, with uneven levels of success so far, are outlined in my earlier post on How To Achieve Positive Returns on BLC.
Bitbond, the 3rd largest platform, provides the closest to full USD peer lending transparency like Lending Club or Prosper does by letting any account holder download the entire loan history and examine and slice and dice however you would like. For instance, as of today and including cancelled listings, there have been 2641 loan attempts with 1551 loans executed. There have been 119 charged off loans, 70 defaulted loans with an additional 76 loans late that will likely default. The charged off and defaulted loans equal a default rate of 12.18% and including the lates and defaults together we are at a default and likely default rate of 17.08%. So far, their default rates are the lowest.
So we see that we are in a volatile environment. and now let's look at what this means in building a portfolio and in the math itself.
When we have a 20% default rate this means that 1 in 5 loans defaults and nearly every default is a zero payment default meaning no payments are made. This is what that looks like:
|Amount Lent||Principal Payback||Interest Required|
|5 BTC||4 BTC||1 BTC|
When 1 in 5 loans doesn't pay back, we need to earn 25% on our remaining 4 investments just to break even. Most investment rates are listed as monthly on these sites so this equates to just a hair over 2% per month. In order to compensate ourselves for the defaults that will happen, we need to earn more than this so we can get our principal repaid and actually earn some interest.
How Do We Get Those Returns?
How do we work to get the 4 correct out of 5 and give us the returns that we need? I've outlined a couple of my 10 Rules that I use in previous posts including Don't Be Your Borrower's Biggest Lender and Keep Excellent Records of your returns. But there are some other things we can do too.
I cannot emphasize enough how important engaging with your borrower is. By now, nearly every borrower I lend to is someone I know from groups, forums or conferences. Someone who wants to not pay will still not pay but when people are borrowing from colleagues and/or friends or those in their community (in this case the BTC ecosystem), the chances of non-payment drop quite a bit. I still lend to some newer borrowers but my default rates there are higher.
Ask them questions. See how they intend to repay. Is it profits or do they have enough in fiat money funds to repay regardless of their BTC based outcome? Bitcoin lending is real social/community lending if you allow it, and you should.
In order to be part of the community I mention above, you have to actually be part of the community. Thankfully there are many small and some quite large FB groups and forums to join where you can interact with others. People are very friendly and collegial and want to help each other. We do everything in these groups from share information on borrowers known and unknown, and information gathering techniques like showing my non-American friends how to search a state website to see if a company is registered there as they claim. The groups range from public and open to closed and even secret when certain borrowers have trade secrets and market advantages that they do not want exposed to the public.
Use Common Sense
If someone says they are a trader but does not have a LocalBitcoins account, then they are probably not really actively engaged in the purchase and sale of Bitcoin. This is just one example of simple things you can see in a profile or ask about.
One listing I just recently saw on Jam was for a small business loan and the first thing I noticed when I looked at the other accounts linked to Jam (like Twitter, FB, etc) was LinkedIn. Guess how many contacts this 'businessman' had on LinkedIn? NINE. Yes, only 9 connections. I have more than 9 connections on LinkedIn just from people I went to elementary school with, let alone from contacts made in the business world and I bet you do too. This is easy nonsense to spot and avoid.
Diversify AND Concentrate
All good portfolio management means diversification and you need to do it. If you read my Positive Returns post, then you know I also concentrate too. Certain borrowers have proven themselves and they get more coin from me at a lower rate (usually) than other borrowers do. If I have 2 very reliable borrowers that I have a high degree of confidence in, then I will overload (some) on them. Instead of them representing 2 of the 4 loans I have to get right out of 5 (see The Math), it may equal 3 or 3.5 out of 5 in terms of my investment, thus making positive returns a little easier to attain.
The big 3 BTC platforms total a little less than $1.5 million worth of BTC in loan volume per month. It's important to understand that this market is still small, yet growing. By contrast, in the last quarter, Lending Club had a loan volume of $1.9 BILLION. BTC lending platforms can, and I think will, scale up and become players in the BTC ecosystem. It will be a volatile along the way although we can take advantage of that to try to get better than market returns from our investments in this exciting space.
If you want to follow me on the platforms, I'm StuP2PLending on Jam, StuFinancesTech on BLC (which is also my twitter handle) and there are no follow features that I am aware of (for better or worse) on Bitbond.