I noticed something interesting in my returns when I calculated my full portfolio returns for December 2014. You can review those returns in this post. The big impact of my Bitcoin based p2p lending returns is something even I was surprised to notice. I knew my returns there were volatile but I thought that the ups and downs would even themselves out at a slightly higher number than the 1% per month that is my portfolio goal each month. In case you didn't see, this is what it looked like:
|12/31/2014||Interest Rec'd||Net Interest||Principal Rec'd||Principal Remaining||ROI|
|Lending Club Loans||33.97||33.12||51.11||2964.91||1.12%|
Let's dig a little deeper into this and look at the ups and the downs of these returns
Yield Enhancement and Early Payments
One thing Bitcoin loans provide is the chance to enhance your yields through early payoffs. When a Prosper or LC loan pays off early, the payoff received is only the principal. As an investor, we miss out on all of the interest we would have received on this loan that we already selected to put our money into. Now we do get all of our money back, but now we have to go and select another loan to try to get our desired yield, which in my case is 1% per month.
Bitcoin loans work differently. An early payoff of Bitcoin loans includes Principal AND Interest still remaining. This is a huge enhancement to our yield as instead of receiving our money in 90, 120 or 180 days, we receive that interest now. In fact, my projected BTC yield for December was supposed to be around 5% but my yield enhancements led to a rate triple of that at 15.41%
The early payments led me to some research and I found out something else. Almost no one pays on time in Bitcoin. In fact, nearly 4 in 10 payments I receive are not on time. Thankfully, 2 of these 4 not on time payments are early payments which enhance my yield as previously described. The other two (approximately as its a little less than 2 out of 10) are non-payments. Here are my actual repayment rates from BTCJam and BitLendingClub (BLC)
for our purposes here, repayment rate is how many payments are received based on how many are due. So for instance, on a Prosper loan, if we receive 8 payments before a default on a 3 year loan, that would be 8 payments out of 36. If we were in month 12 of this loan, we would have received 8 payments out of 12 or 66% of our payments. OK here is the chart
|1/15/2015||Payments Rec'd||Total Payments Due||Repayment Rate|
So you see here that my total repayment rate is 82.44% so a little less than 2 out of 10 payments that are due to me I never received. In the USD world, if this happened on Prosper, it would be a calamity, a crisis In BTC, its just part of the game. This chart also clearly states that my BLC repay rate is much higher so I need to think about if I'm going to put more BTC into BLC and less or even take some out from BTCJam.
Price Movement in Bitcoin
The elephant in the room that all BTC investors have to answer to, especially to their (our) non-BTC believing friends is the question about the price movement in Bitcoin. In November 2013, BTC peaked at a price of $1300. Then a week or two later the Mt. Gox exchange went under and Bitcoin dropped hard and fast. 2014 saw 2 major trends in the price of Bitcoin: continued price drops and price stabilization. The price drops made many people think that Bitcoin is 'crashing', its 'dying' etc etc but the truth is that most of the drops during the year were slow and steady and the price stabilized throughout the course of the year. Stabilization is important if merchants are going to adopt Bitcoin as a form of payment for their business.
I could tell you what I tell most people, which is that I don't really care what the price is at any given time. It's true I don't because I like investing outside of the USD and holding a currency outside of the USD for diversification. I hope I never have to swap my BTC back out to USD. There is still, and for me will continue to be, a relationship between BTC and USD as long as my expenses are still in USD. As my loans continue to earn me more BTC, I expect to keep making money even with volatile movements in Bitcoin's price.
With my 82.44% repayment rate in Bitcoin, I am fortunate to be doing better than most. As this number implies, Bitcoin investing is not for the faint of heart due to all the real and potential losses that can come from it. In December, my returns were supercharged thanks to Bitcoin and instead of a 1.13% return for the month, I ended up at 2.97% for the month. For me, these are tradeoffs worth making. If you are interested in it, I'm in the process of creating some investing/risk control guides for lending in Bitcoin.