My first month investing in peer loans based in Bitcoin (BTC) has come to a close and I have learned some VERY important lessons.
Lesson 1: LC is Blind but BTC Sees
Prosper and LC are double blind meaning we don't know who our borrowers are and the borrowers don't know who we are. BTC lending is different. Social matters. The lending platforms look to link up LinkedIn, Facebook, EBay and PayPal accounts as ways to verify identity and sift legitimate borrowers from those just looking to borrow and walk. This is important due to the multi-national and cross border lending opportunities that we deal with in BTC that we don't with US only based borrowers on Prosper and LC. At least 1/3 of my own investments have been to someone who lives in another country.
Lesson 2: Arbitration is Used and Needed. Higher Default Rates
BTC lending takes advantage of online arbitration through Net-Arb. This is a great service that helps lenders recover some of their loan losses. In the USD p2p world, Prosper and LC both have an established collections process for late loans but upon default LC sells to a debt buyer for pennies on the dollar and us investors are out of luck for that loan. Prosper, from what I have learned so far, does not sell their defaulted debt but we are still equally out of luck there. Since returns and payment history are so good with Prosper and LC this has not been a big issue.
The BTC lending world requires a service like Net-Arb because default rates are higher and the high degree of technological know-how among BTC users (present company very much excluded) is much greater leading to attempts to hack and otherwise game the system.
Lesson 3: Buying is cheaper than Mining
Mining provides an important service to the BTC world. What mining is and does is beyond the scope of this post but it is an important function to the BTC community. The reward is payment in BTC for providing the service. The hardware required to mine is expensive. With each passing month, the difficulty in mining increases exponentially. Just like when mining for gold, after the easy to find lodes are found, you have to dig deeper into the mine. It's more difficult and more time consuming. This is exactly what happens with Bitcoin mining, without the physical mine.
One of my friends has been mining with 6 machines for 6 months now and he was able to buy more BTC with one purchase in 30 seconds than he has been able to mine. My own Bitcoin buying experience allowed me set up my digital wallet, link up a bank account and buy 3 Bitcoins in a span of less than 15 minutes. Since the bank confirmation was required through ACH, I had to wait the 3-4 business days to get them but it was easy as could be to buy them. Buying is easier and cheaper than mining them.
Lesson 4: Welcome to the Wild West
If you think USD peer lending is risky, you haven't seen anything yet. Lots of great but unorganized information, little underwriting and verification to confirm uses of funds, little incentive to deny borrowers to list their loans on the platforms (although some do get declined). These are all non-concerns in the Prosper and LC world. Both underwrite with solid credit guidelines and decline more borrowers than they accept. BTC lending is still new. It's like what Prosper or LC was like 5 years ago, not the well run more established entities they are today. BTCJam does little if any underwriting that I can tell but BitLendingClub is a little more rigorous with their requirements.
BTC lending is NOT for the faint of heart.
The BTC lenders are learning and improving daily but it is still very very early. For alot of what you need and what supports your lending efforts, you are on your own..........except that you aren't. See below
Lesson 5: True Community Lending
BTC lending is true community lending. There is a BTC community, a whole ecosystem of people, businesses, organizations, etc all of whom support Bitcoin. This is lending by this community for this community. It is true community/social lending. Many loans go to BTC based businesses or to those in the important business of mining BTC to keep it growing safe and secure. To further the community feeling, as well as share information on borrowers and bad actors, there is one of the best things I have found so far, the Bitcoin Investment Group on Facebook. It's a closed group, invitation only but if you start lending on one of these platforms, let me know and I will get you into this group. Here I have learned so much about this community, BTC in general, some of the related technologies, the good and bad of the lending platforms and have participated in my own and group due diligence of other borrowers to reduce our collective risk. It's an amazing group of people.
Here's an example of a listing on the Bitcoin Investment Group on FB where some info is given and some requested on a loan listing on BitLendingClub: (by the way it says Me Gusta instead of Like cause I have my FB settings in Spanish so I can practice :))
Lesson 6: Higher Risk and Higher Returns
Given some of these additional risks, including lending to someone in Macedonia who is not subject to our US laws, you would think this would equate to higher interest rates. And It does. My June returns for my first month of investment were 2.4% or 28.8% annualized. My June returns so far for only 2 days into the month , AND IF NO ONE ELSE IN JULY PAYS ME THIS MONTH, is already 1.90% or 22.8 % annualized.
Here's a snapshot of one of my days in late June on BTCJAM
If you want to help borrowers anywhere in the world, further embrace the Peer to Peer lending model and potentially juice up your returns from what Prosper and Lending Club offer than BTC lending is something you should try. It's not for everyone. Specifically, the data analytics guys that like to analyze everything from default rates at every 5 point drop in FICO to how many loans held guarantee that you won't lose money will be hard pressed to find enough loan data available to work with and analyze.