Bitcoin Lenders: What Is Your Loan Duration? Should You Care?

In my last post, I looked at loan duration for USD based peer to peer lenders. Since I lend in BTC as well, I thought I'd do the same exercise for my Bitcoin loans and other BTC lenders.

Duration, which is the sensitivity of a bond or loan portfolio to interest rates, and  the related calculation of Average Term Remaining have different meanings for the USD based peer lending world versus those of us who lend in BTC.  In the BTC world, we don't have a concern about Interest Rates since the rates we earn on our loans are well above market for the risk we take in lending. We have other concerns, one concern in particular.

Price Volatility

Everyone who buys BTC seems to trade it as well, either very actively to earn short term gains or in the long term where they are trading their home currency for BTC hoping to use it as an alternative store of value.  Not coincidentally, this is one of the 2 major defining points of what makes something a currency. The other is being a medium of exchange. Many who are building businesses in the Bitcoin economy hope to never convert back out into their home currency, but the reality today is that the conversion back to USD (for me) is more likely to occur than not.

Duration and average term remaining are very important if you have a definitive strong opinion about the value of Bitcoin in the future. Regardless of whether you think the price will rise or fall over the long term, if you have a strong belief about it then you care about Duration. If you think prices will rise then you want a longer Duration and Average Term Remaining so you can get paid back in BTC more valuable than you lent out and the opposite is true if you think the price will fall.

How Do We Calculate Duration?

Duration is a complex calculation and most bond portfolio Duration is actually the Macauley version of Duration but Average Term Remaining isn't so tough so that's what I'm going to focus on. We are going to start the same exact way as before except this time our focus is not on Months, but on Days. We will still figure it out with months and convert to Days. This is what the beginning of your spreadsheet should look like:

first excel sheet

 

This is the same way we started before. First, lets do our Rate (B5). My goal is 2.5% per month so I'm going to enter .025. Our Future Value (B3) is the same as last time, meaning that it's 1 so as to not mess up our calculations, which is what would happen if we put in zero.  I'm looking at August month end numbers because I am still analyzing September's performance.

Next we are going to put in Payments (B4). You are tracking your monthly payments somehow, right?  On BLC, in August, I had 10 payments due and I received 9. Thanks guys. My payments received (both Principal and Interest) in August was 0.635. On BTCJam, it was 1.448 giving me a total of 2.082. The negative version of this number or -2.082 goes into B4.

Now for PV (B1). On both platforms this is pretty easy to find. on BLC, its just Amount Invested-Amount Repaid. for me in August that amount is 1.14 BTC.  On BTCJam it's pretty easy too as you can just look at the Pending payments on your Payables page with the Calendar on it. Mine in August was 2.00 BTC so my total PV is the sum of these or 3.14.

Do NOT put this number in B1, put it in C1. You'll see why in a second.

Now we have to play around with Excel. We are looking to solve B2 but we will have to solve for B1 and we want B1 to be as close to C1 as possible.

btc duration sheet 4

Yours should look similar to what I have above. I am going to start with a plugin figure, a guess on the number of months. I am going to start with 3 months so I put 3 in B2. When I put 3 in B2 and solve for PV I got 5.17. This is far higher than my 3.14 PV in C1. If you do the formula correctly, any number inputted into B2 will change the PV for B1. Turns out  that 2 months gives me 3.16, very close to my 3.14. My exact number of months where the calculated Present Value matches my Principal Balance in cell C1 is 1.99 months.

Present Value $3.14 3.14
Months 1.99
Future Value 1
Payment -2.082
Rate 0.025
Average Term Remaining
59.7

My average term remaining, which is a good approximation for duration is 59.7 days. I'm good with this. I think that long term BTC will rise in price but in the short term I dont know what it will do so having loans with an average payoff of my principal in 59.7 days works for me.

Based on what we think about Bitcoin's price we can take this information and work to our specific goals. Do you think it will rise over time so that longer durations work for you? Then increase your duration by going longer term. I could find a loan I like from a BIG member for 180 days at a rate that I like and that will help to increase my Average Term Remaining. Skeptical or unsure of price? I can cap my loans at 30 days to shorten my Average Term Remaining.  This is a great no-nonsense way of managing your BTC loan portfolio.

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+

2 thoughts on “Bitcoin Lenders: What Is Your Loan Duration? Should You Care?”

  1. Right now, shorter is better. As the market grows, people will get rated and comfort levels with develop with people with good histories. Next will come the trust behind the ratings. I earned 12.98% on Lending Club over the last year and now I rarely check in.

    Here we are still in the Wild West and I love that you are trying to apply historic models to this market. You will need to adjust, but don’t know how today. Nice work and thanks.

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