How to Profit in a 20% Default Environment

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

BTCJam

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:

Jam stats per FB group

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.

Courtesy BTCJam a la Zaibot
Courtesy 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

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:

Courtesy BitLending Club Statistics page
Courtesy BitLending Club Statistics page

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

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.

The Math

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
1 1 0.25
1 1 0.25
1 1 0.25
1 1 0.25
1 0 0
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.

Engagement

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.

Facebook Groups

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.

Conclusion

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.

 

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

18 thoughts on “How to Profit in a 20% Default Environment

  1. stu,

    i used to like your work but this post is somewhat pathetic. Taking random screenshots of investor data from a facebook group? What is the sample size of the data? Are there any sources for this data? Was this written by a statistician? This doesnt seem like something a p2p expert would engage on.

    • You might be right if this was random, however this is not random. BTCJam themselves posted it to their own Facebook group. They posted it for their investors, some of whom are members there. There is no better place to get their information since they won’t make it public except for the A la Zaibot site. They are not as transparent as the other platforms.

  2. Hi,

    so basically, what you’re saying is that it’s (almost) impossible to get an acceptable ROI in the long term without engaging with borrowers and trying to find the “good ones” ?

    I don’t have facebook and don’t plan to, i’m not really interested in spending time on forums, trying to find information on borrowers. So, it’s a no go for me. End of the story, right ?

    To be honest i’m very interested in this business, i don’t have trillions to lend, just 2/3 thousand (euros), and i’d really appreciate if you could help me a little bit, just to start and after i could try to concentrate on finding borrowers that i can trust… maybe you could recommend some ^^

    Btw, would you recommend Bitbond ?

    I’m French and i don’t know which platform i could use first…

    Thanks for reading me.

    • Hello Olivier, I would not say that it’s impossible without it but there is no question that you have to do some research on your own and not be reliant on what the platforms tell you alone. The loan platforms are not trying to deceive, it is that they have limited information on borrowers so as a lender you have to dig to find things out for yourself or get together with others like in forums or Facebook groups to do so.

      You can follow me and see who I lend to on the platforms. I’m Stu@p2plendingexpert.com on Bitbond, StuFinancesTech on BitLendingClub (also my twitter handle) and StuP2PLending on BTCJam. I like Bitbond. I have talked to Radoslav Albrecht and he is a serious guy trying to do good work. BitLendingClub is my current favorite platform

    • BTCPop has features which differntiates it to the other lending platforms mentioned here.

      – There are insured loans depending on the rating of the borrower. Loans can be insured up to 75%.
      – Apart from the insurance borrowers can put collateral on their loans which will be locked until repayment. Collateral can be altcoins like ltc, doge, nmc, dash, ppc or BTCPop or Ardeva shares.
      – That means, your default risk will be reduced, because why would someone want to default if he has a loan backed with 80% collateral which he cannot get back until repayment?!

      • Brad, you’re right that Pop has some other options.

        As a rule, I do not lend my own coin or report on new platforms until they have been in business for more than a year. This is for numerous reasons including that platform risk, the risk of the platform itself going out of business, are extremely high in the first year and without outside funding to help. Pop has no outside funding yet and while they offer insurance, they hold the proceeds themselves so if they got into trouble of any kind, the insurance is the first thing that would go away.

        They need to stabilize their offerings and stop offering so many options and then I will be more inclined to invest on their platform. Their expansion into areas that require compliance and regulatory advice (insurance, share issuance and securities) are going to increase their compliance costs tremendously yet my conversations with Lee tell me so far that he does not see it that way. My view is that is a mistake on Lee’s part and it puts their entire platform at risk.

  3. Good to hear Stu 🙂

    I’ll try Bitbond and search for your profile.

    Another question : how can i calculate how many BTC should i lend for a start (the safer amount), and also as i’m kind of newbie (only used BTC once) do you think it’s safe to make a deposit of 1/2 or even 3 thousand €/$ ?

    Any good read about that ? If the risk of losing lot of money, i won’t take it.

    Thanks a lot.

    Reagards

    PS: i changed my username as it wasn’t in the right order…

    • you should start small. I will lend larger amounts but my first loans on Bitbond were only 0.10 BTC per loan. This way you can spread your coin out over numerous loans.

      • 0.10 BTC = 20 €

        So i guess i’ll have to make a lot of loans in that case, did you ?

        Looking at Bitbond loans page, some of em have huge amount… idon’t see many under 1 BTC loans. You think i’ll find borrowers even for such low amounts ?

        Also, i have to say i’m not quite sure how the loan page works on Bitbond… what’s with the Funding Status column… ?

        • The loan amount does not matter except that you may not want to be on a loan that has a high repay amount required. I prefer smaller loans most of the time. You are buying a piece of a loan so you can put in your 0.10 into loans of 1 BTC, 2 BTC or more since you are buying a piece of that.

          The funding status shows the amount of the loan that has been funded, how much is left to be funded and how long before the loan listing expires. hope this helps.

          • Oh boy,

            this is really complicated. Bitbound seems different from others platforms.

            If i understand correctly (took me some time, because english isn’t my native language) on the listings page on Bitbound there is only the borrower’s requests. So if i want to lend BTC to a specific borrower i have to “complete” his request.

            What about the highlighted 3 requests, any particular reason ?

          • No you can invest as much or as little as you want in the specific request.

            I have no idea what the highlighted requests are. I see a green bar that shows how much of the loan has funded and how much remains to be funded.

  4. Hi Stu,

    so i looked at your Bitlendingclub profile, and i was surprised to see several default payments on your loans, hope you didn’t loose too much…

    Can i ask what interest rate you’re getting back per day ?

    And if it’s not too intrusive how many BTC and/or $ does it make ?

    Surprised also to see the amount of your loans, you seems to be a very reasonable person. Maybe you don’t do this for the money and just want to help investors on a small scale.

    Thanks for your time, it’s appreciated even if i realize now that it’s not as lucrative as i thought, but i think i’ll give it a try nonetheless.

    • I don’t calculate daily. I do monthly and try to get 1.5%. Most months I do even with the defaults. You can see from my portfolio reports how I’m doing

  5. I would like to explore the opportunity to network with all the “Peer to Peer” lenders. My platform is to buy all their “defaulted” loans. I’ve been buying charged off debt portfolios for over 20 years, and I may have a few solutions… I can be reached at – 714-936-7671

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