This is a guest post by Chris Grundy of Bitbond. Chris is an SEO Specialist, bitcoin obsessive and avid tech fan who has written for a variety of publications as well as regularly contributing to the Bitbond blog. You can follow him on Twitter or connect with him on LinkedIn. Any feedback is welcome and encouraged.
Bitcoin p2p lending platforms have three key advantages over their fiat counterparts: the ability to diversify globally, the subsequent access to higher interest rates as well as higher ROIs, and finally, lower fees for borrowers and lenders.
As a reader of Stu’s blog, you will already be well aware of the advantages of p2p bitcoin lending however. So instead of preaching to the converted, I am going to show you how to maximise your bitcoin lending returns.
If you follow these four easy steps you should be able to see the high yield returns you’ve been waiting for.
1 Get to know your borrowers
We are more interconnected than ever nowadays. Indeed, back in August, the number of worldwide social media users broke through the 2 billion mark.
What this means for you as a p2p bitcoin investor, is that you will be able to find and connect with any reputable loan applicants on the three major bitcoin lending websites.
Facebook, Google plus, Twitter, and LinkedIn provide professional and social networks which allow potential investors to get to know loan applicants.
As Stu has already pointed out, this is a crucial step to take for your bitcoin lending endeavours. Borrowers with whom you establish a personal rapport, will be far more likely to repay you in times of personal financial turmoil.
Further, you will be able to assess the applicant personally, which is a key part of avoiding scams and subsequent defaults and non-payments.
It might seem like a lot of effort at first, but consider the ROI’s you will reap if you avoid defaulting borrowers. They will be leagues above any other p2p investments.
Right, so getting to know loan applicants before investing is important, but how do you do it? Facebook groups, such as the Bitcoin Investment and Loan Market community, are a great place to start. Here you will find the most recent information on the three major bitcoin lending sites. You will also be able find a majority of reputable borrowers in groups like this, allowing you to contact them, assess them personally and make a bitcoin investment.
A faster way of connecting with specific borrowers is contacting them directly. Using the comments section available on individual Bitbond loan listings, you can easily get to know the borrower before investing. In the screenshot provided below, you can see a concrete example of this.
Always establish a personal rapport with a borrower, before investing a larger sum of bitcoin.
2 Diversify your bitcoin investments
Diversification is probably the most important word in the bitcoin lending industry. Again, as a reader of Stu’s blog, you will know better than to commit the cardinal sin of bitcoin lending: Investing a large sum of bitcoin into one single loan.
However, what are you are probably not doing, is actively diversifying across borrowers who do not have a personal relationship to each other. This is important, because if you invest in two loans, one belonging to the husband, and one belonging to the wife, the possibility of both defaulting in times of financial turmoil are higher.
This is because, should a personal relationship exist, both applicants are more likely to experience similar economic circumstances. In short, if one falls on hard times, they both fall on hard times. Thus, diversify your investments across people who are free of a personal relationship.
Further, if you are not yet diversifying your investments across as many countries and regions as possible, you should. Take the global recession of 2009 for example.
Now you might argue that, as the terminology suggests, the financial impact of the recession was ubiquitous and diversification would have had little-to-no impact.
Interestingly, the average growth rates in emerging markets in 2009, the year of the recession, was 2.3%, compared to the negative GDP trend experienced by most developed economies.
If we draw the reasonable conclusion, that stronger economic growth rates have a positive correlation with loan repayment rates, lenders with bitcoin investments diversified globally, will have seen higher repayment rates and higher ROIs.
Therefore, diversify your investments across borders and economic regions to maximise your bitcoin lending returns. Especially in times of regional economic crises.
3 Create a Winning Investment Strategy Using Historical Data
In the p2p lending industry, the availability of relevant borrower and investor data for public consumption, is one of the best developments lenders could have hoped for. Indeed, LendingClub, Prosper, and RateSetter all provide this information on their websites, making it somewhat of an industry standard.
Specifically, this publicly available data allows sophisticated investors to accurately gauge average earned interest rates across credit ratings for example, and to form a strategy out of that.
This available data allows you to create a sophisticated investment strategy, whilst accessing some of the highest ROI potentials available.
You can do this by applying certain filters. Despite loans being awarded similar credit grades, a degree of variability remains. This is when filtering comes into play.
Filtering in peer to peer lending is choosing the loans that have performed better than others historically, even if they command identical credit ratings. It plays a crucial part in maximising your bitcoin lending returns. Let’s take a closer look at Bitbond’s current CSV file and see what we can find out.
Once you have downloaded and opened the CSV file in Excel or Google Sheets, you should be able to see host of useful information, as shown below. (I have hidden several columns, like user ID and date of publication, for example, for size and relevancy reasons.)
Now begins the fun part. Using the filters at your disposal you can analyze the historical data, and create an investment strategy which will maximise your bitcoin lending returns.
The strategy I will use in this example will focus on one of the bugbears investors often have: default rates. Keeping in mind that Stu recently revealed BTCJam’s default rate so far in 2015 to be 22%, I will use filters to show how you can cut that number down to a fraction with Bitbond and historical data.
Once you have a good idea of all the data contained in the CSV file, start to narrow down the metrics as seems appropriate to you. I will start with social media accounts.
After playing around with the filter for a few minutes it becomes apparent that there is a clear correlation between single social media accounts connected and repayment rates. In other words, we can give certain social media accounts more weight than others.
To calculate the average default rate indicated below, I simply looked at the number of loans defaulted on as well as charged off, and divided them by the total number of loans. Obviously, the relevant social media account filter needs to be on for both figures.
Keeping this in mind, the average default rates for borrowers with a single connected social media account on Bitbond are as follows:
- LinkedIn - 12.92%
- Twitter - 13.13%
- Facebook - 19.46%
As you can see, a borrower who has connected his LinkedIn or Twitter account is historically more likely to repay his loan, than someone who has merely connected their Facebook account.
Turning away from social media, we can use the data provided to find other interesting correlations. As of 28/8/2015, Bitbond has not had a single “Retired” borrower default on his or her loan, for example. This might incentivise you to base an investment strategy around borrowers who have given “Retired” as their employment status.
We can also see, that borrowers who have connected their eBay accounts, have the lowest default rate compared to any other single account. Thus, in order to maximise your bitcoin lending returns, give extra credence to applicants who have connected their eBay account.
Going a little deeper, we find that borrowers with an “E” credit rating, who are self-employed and have connected their Ebay account to their Bitbond account, only have a 7.14% default rate. Considering interest rates for “E” rated borrowers hover around the 24% mark, this represents a great opportunity for you to maximise your bitcoin lending returns.
4. Never Underestimate Common Sense
Now that we have the technical side behind us, it’s time to focus on the fundamentals. Never forget to take in and analyze the loan details. A borrower who claims to be able to repay a large loan within 6 weeks at 35% interest rate, represents a significant risk for you, the investor.
Read the loan description. If the loan is being used for something you are not familiar with or don’t have adequate knowledge of, don’t invest. Stick to what you know and trust.
Perhaps the most important point here, is to check out the loan and payment history of the applicant. I have provided a screenshot below, with the relevant fields painted yellow. The payments history should be understood as, #loans repaid | #loans repaid late | #loans overdue.
In this example, the applicant has repaid two previous loans on time, with no late or outstanding payments. He should therefore be considered creditworthy, and will most definitely repay his loan. Look at the payments history to ascertain a good impression of the borrower, and maximise your bitcoin lending returns.
Watch your bitcoin lending returns grow
Thank you and well done for reading this far. This was initially going to be a shorter piece, but I didn’t want to cheat you on the details. In conclusion I would just like to add, that it is important to start investing small amounts and only invest larger sums of bitcoin in borrowers you have a personal rapport with. They will be more likely to pay you back.
As Stu has said himself, diversification does not mean investing in every borrower equally. It simply means not putting all your eggs in one basket. Once trust is established, start going for the larger returns.
It is important to note here finally, that the bitcoin lending industry is still at the beginning. Early adopters, who embrace the possibilities of p2p bitcoin lending, will have gained the experience, nuance and returns, that the vast majority will lack, once it goes mainstream, as traditional p2p lending has today.
The ruling in Kentucky in June of this year, has helped set an important precedent for bitcoin lending, putting them on similar legal grounds to traditional loans. With this ruling in mind, and these four steps to maximise your bitcoin lending returns, you are all set to go! Thanks for reading.