BTCJam: Providing More Info but Still Falling Short

There's quite a bit of debate in the Bitcoin Investing world about BTCJam. They are without question the largest BTC based peer lending platform and they have the most VC funding.  The essence of the debate is whether the Jam are purposefully trying to only earn fees with no intent to eliminate scammers from their platform or not.  It's an important question and those of us who have seen how the USD platforms work know that trust in the platform is one of the important keys to being successful. This debate is about how trustworthy BTCJam is as a platform.

To clarify, a scammer in this case is someone who clearly provides false information and a loan listing that they very clearly never intend to repay thus walking away with the Bitcoin. This is easier to do than it is in the USD world due to the pseudo-anonymous nature of BTC and the lack of credit bureau reporting (and subsequent credit score penalties that would result) due to the fact that anyone in the world can get, lend, borrow or run with Bitcoin. It's not just for Americans like Prosper and LC and Americans know a default will be reported to the credit bureaus hurting their scores.

Back to the debate, many believe Jam is just throwing every listing up on their platform to earn fees with little due diligence and/or help for investors. The proof used by this side of the argument, and I have seen this too, is when information on defaulted listings is released, I have personally seen at least one case where it was very clear that the documents were doctored and not genuine.  Jam has sullied its name in the eyes of many investors for reasons like this.

Tip for Using BTCJam: Verification of information on their platform is NOT verification, it is only receipt. You should think of any information listed on Jam as not being verified but only being received by them.

My Position

I fall on the other side of this debate. It's my view that in an attempt to grow, scale up and provide the revenue, profit and whatever other metrics their funding partners require, that they are simply overwhelmed. Too much, too fast. Considering that they are trying to improve and that with the technological savvy of most of their investors (present company excluded here) their API is so difficult to use are a couple of the reasons why I believe that they are overwhelmed. After all, the developers that put the platform together certainly have the capability to make a fully functioning, organized and well documented API if they wanted to or more likely, had the time to do so if not working on other priorities.

I want to be clear that as an advocate of P2P Lending and Bitcoin, I want BTCJam to be successful. In fact, out of all the platforms where I invest, each month Jam or BitLendingClub (BLC) is my #1 source of monthly returns for my portfolio. Some months I earn as much as 8-10% PER MONTH on Bitcoin based loans and Jam is a positive contributor to those returns.

Jam Starts With Some Stats

One new development at BTCJam in their attempt to improve is the release of some of its statistics.  Let's take a look at some of them. First, loan volume.

jam loan volume

This is loan volume by number of loans per month and converted back into USD, both monthly and cumulative totals.  An important thing to note here is that the loan volume and USD dollar volume nearly doubles just from April to May 2014. The volume of loans from May 2014 doubles again (almost) in August and stays at a level of twice the volume monthly for September and October. Going from just about 500 loans in May to at or more than 1000 for August-November is really fast, exponential like growth. It's also hard to control. Does this confirm my 'overwhelmed' argument about Jam? Maybe

Jam's Credit Stats

Jam has its own credit scoring system but it can be misleading. Why? First, see my tip above about verification versus receipt. Secondly, as soon as a borrower misses a payment, their Jam score goes down. This means that by the time they default, they are an E score but they may have been an A when they took out the loan. Now it will show in the Stats as an E, which is not exactly accurate.  Unlike USD platforms, this scoring system is really no indication at all of the quality of the borrower or the safety of investing in them.  However, it is the only uniform system across all loans though so let's take a look at 2 different charts from their Stats page.

jam credit scores

What's interesting here is that even using their own credit scoring system, the number of A and B rated loans is declining. The percentage of A and B loans in April was almost half, now it's closer to a third. D and E rated loans are down as well and the growing group over time is C loans. What does this mean?

It could mean Jam is encouraging more borrowers with less verified/received info to borrow. It could also mean that they could have adjusted their rates to make C loans more attractive. Remember, unlike BLC who has a reverse auction system, Jam has fixed rate borrowing where the borrower knows the rate they will pay in advance. We don't really know what it means. Those that believe Jam is just throwing all loans up to see if it funds will think that lesser credits are being encouraged to borrow. However, that would also imply that there would be more D and E loans too, not just C loans. In my mind, the result is inconclusive but something to watch.

Now to the chart that outlines returns for investors. Well, it sorta does....

jam inv returns

As you can see here, returns are grouped by credit and 3 categories: Safe, Risky or No Category. Sadly, this chart doesn't really tell us very much. There are 2 main types of loans: Bitcoin loans and Bitstamped loans where an exchange rate is fixed between USD and BTC for the duration of the loan. These 3 categories are extremely unhelpful. The only thing regarding 'safe' loans on the Jam site is the Safe Search feature and all that does is filter out loans that are paying an interest rate below the recommended interest rate for their credit grade.

The differentiation between what makes a 'regular' loan versus a safe loan versus a risky loan is not identified anywhere thus making this chart worthless. I do find it interesting that despite the volatility in BTC price over this past year that BTC loans still return higher than Bitstamped loans did. I'm also curious how that can be since the price has been in decline since the summer, which favors stamped loans since they lock in a rate that would be higher than the current price if that price is declining.

Conclusion

BTCJam has made a decent attempt to release some of its statistical information to investors so we can make better decisions. We need to recognize that it is an attempt. The success of that attempt, especially with this investor returns chart, is at best uneven. Those who don't trust the Jam are unlikely to be encouraged by this newly gathered and shared information, yet. However, trust can be regained with some by increased transparency, information and access to it, and other improvements that will reduce default rates and make the site more user friendly. It is a step in the right direction.

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+

12 thoughts on “BTCJam: Providing More Info but Still Falling Short”

  1. Thank you for the article and attention to our stats page!

    I will point out a few things:
    Our credit score is machine learning system that uses a perceptron-based neural-network that is capable of generating non linear prediction models and classification, directly helping in fraud detection and prevention, decreasing the default rates, and lowering the investors churning. It is not a basic point system, and is more advanced than any scoring system in the industry.

    Our verification process is not only stringent, but also, each borrower is reviewed by the minimum of three people. Of course there are bad apples and fraud which is why we have a fraud detection software that is currently growing and improving. We also are the only platform that offers legal ramification for defaulted borrowers.

    Your analysis of the “Loans by Credit Score” chart is incorrect. For this chart, we index the borrower’s credit score at the date of activation. For example, this infamous borrower (https://btcjam.com/users/14217) is currently a D- and overdue; however, when you go to his overdue listing (https://btcjam.com/listings/14674) you will see that he was an A when he activated it. The A score is reflected in this chart.

    Safe search filters out listings that have interest rates below the recommended interest rate. The suggested interest rate is based on your credit rating, but also your loan history, payment behavior, ponzi scheme behavior, outstanding debt, and many other variables that are used to calculate the risk of the INDIVIDUAL listing.

    Once again, thank you for the time put into this post. We hope to see more in the future. Feel free to contact me if you have any questions.

    • Hi Alexis, thanks for checking in. As you saw in the piece, I am all for more information and more transparency.

      As to your credit scoring system, it may be a machine system and may turn out to be really good once there is a large scale of borrowers but for now it is not effective. I also stand by my verification versus receipt from not just the loan with JHash but also with Griff, whose documents were clearly doctored. If you are now having 3 people visually check and verify then that would be a big improvement but I, and most of your other investors, have a hard time believing that is something you have been doing all along.

      If your loans by Credit Score does analyze the score when the loan was taken out, then that is definitely good and I stand corrected on that. It does not appear that way on the chart but I take your word for that.

      Regarding the safe search, you do go into greater detail than I did on how the suggested interest rate is calculated (and thank you for that) as I only mentioned that it excludes rates below the recommended rate.

      I hope we can keep the conversation, information and transparency going. I know a bunch of investors that want to believe you are trying to work in our interest and working to improve on your platform and its offerings.

      • Stu, we do much more than visual verification on identities.

        We are the only platform that verify bank and credit card accounts, among many other measures that we cannot disclose otherwise bad actors can take advantage of that knowledge. Regarding the way we calculate interest rates, this is called risk based pricing and is the way to go for lending. Banks do that, LendingClub does that, Prosper does that. Reverse auction systems where abandoned long ago since they were proven ineffective.

        We are also the only transparent Bitcoin P2P lending company since we are the only one disclosing investor returns on our stats page, we also do not distort the repayment statistics by doing loans on platform ourselves or by doing loans that the borrower cannot withdraw.

        • Hi Celso, thanks for checking in.

          There have been a couple of instances at least, including the ones I mentioned in reply to Alexis where that seems to not be the case or the verification work done was shoddy. If you have multiple people doing it now, then that’s great and is a big improvement. Again, its hard to believe based on some of the things we have seen that you have been doing that all along. Multiple verifications now is really good and I hope that continues going forward.

          I agree with you on your disclosure of your stats, which is why I congratulated your attempt at doing that. However, you are not the only transparent Bitcoin P2P Lending company. Both BitLendingClub and Bitbond offer different and varying levels of transparency to what you offer. They are less on the returns and more in other areas. Bitbond, for example, allows for the download, filtering and manipulation of all historical and current loan listings. All of you are slightly transparent and not transparent enough for investors.

          As an FYI, Lending Club and Prosper both offer all of the transparency that the 3 of you combined offer and more. I hope that you guys get to that stage sometime soon too.

          • There will be cases of identity theft but our level of verification today is way more than just acknowledging receipt, saying that is just plain misinformation. Our verification process is by far more comprehensive than the other two players, if you don’t think so please give some examples of things others are doing and we are not, I will be happy to implement then if they make sense to us.

            If you have an investment site you need to disclose the returns, this is the most basic information. It’s also misleading to have loans that borrowers cannot withdraw and to take loans for your own company and then use the “repayment” information to boost your stats.

            The download of loan history is interesting, today we provide an API and everything can be grabbed from there, but a csv may be more convenient for some people for sure.

          • If you would like to outline your verification process in detail for me, I will add it to the post or do a brand new post with your information and present it to my fellow investors that invest on your platform.

            One of your competitors links up to Ardeva, an independent due diligence service, and it provides a token showing what information has been submitted and verified. Borrowers that use it default far, far less than the overall pool of borrowers.

            I agree about posting returns and how inability to withdraw can be misleading. I also know that the same platform you are talking about that does not allow withdrawals does more in attempts to prevent fraudulent/scam transactions than you do. They do things like investigate IP addresses where profiles originate and work with us investors when we catch something that you might not in our own due diligence.

            I like your improvements and believe if you were more proactive on the scam front, you can regain some of the trust that has been lost and sent investors to BLC instead. Letting anyone withdraw does make it truly peer to peer but without other safeguards in place it looks like you invite people to come in and try to take our invested coins while you just collect your fees. Having one without the other leads to mistrust. You need to have both. Lending Club and Prosper have the threat of reporting to credit bureaus to hurt the good credit scores of their borrowers as a safeguard and this is something we don’t have in the BTC world so you have to have your own safeguards in place.

        • I would dispute the transparency of those stats and they also differ from my impressions and analysis.

          Until Jam shows the interest earned overall by investors (a single number for 2013, another 2014, or whatever period you want to talk about, or by loan issuance cohort) and also show the aggregate numbers for credit losses (both principal in default and principal that is late (by 30 days, 60 days, 90 days whatever you break it up as granularly as you want as long as you actually share the data), those stats don’t hew to reality. Principal repaid means nothing given how many loans are short term. I did the net return calc for only loans issued in 2014 and it wasn’t close to what those stats suggest and that is before controlling for interest in which scammers pay interest to other scammers, inflating the overall interest number.

          It’s hard to present stats in a simple way that can communicate to a broad audience while remaining accurate, so I have compassion about getting it right. But until you show the interest paid to investors vs the credit losses experienced by investors [in sensible way, like how I defined them (principal in default (realized?) plus principal in loans or from borrowers that are late by 30+ days (sorta unrealized)], that page is opaque. Discussed here a month ago.

          https://www.facebook.com/groups/btcjammeetup/permalink/863974106954990/

  2. Reality is, it is too early for a statistical model. I too want BTCJam to work for the simple reason that I am a long-term believer in BTC and we need competition. However, they have the standard issue of too much money chasing too many problems. As an investor on their platform I am disappointed in their advocacy of chasing down bad guys. Using a old school “arbitration” process and sending me “Legal Zoom” style letters when a loan defaults is old school thinking. This is the Block Chain era. Lets verify people through their networks and the Block Chain and then chase down those people through those same networks.

    Stop thinking like Chase and start thinking like Ebay (and their rating system) !

  3. “Mike, we do have a rating system and we disclose the connected networks in case of default.

    We cannot disclose that before default because that is against the law!”

    LOL, supplying public information like a facebook page is not against the law.

    Celso, will you reimburse the BTC that was lost due to the lack of verification for your side? As i got a defaulter that is totally bogus.

  4. Thanks Stu for addressing this topic in such an insightful way. I also want to thank the folks at BTCJam for their replies. I’m New to P2P Lending and to Bitcoin. I jumped onto the BTCJam platform with both feet and started investing.

    It’s been a great ride so far, but I have a lot to learn. This blog and been extremely helpful. Thanks and keep it coming!

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