Bitcoin Loans – What is it and how does it work?

Loans are an important part of our society, they allow to grow your money by helping other people to overcome their temporal financial needs. Lending money is an important component in many people’s portfolio, but did you know that you can also lend your BTC?

To the date there are three kind of Bitcoin loans; you can either put your money into someone’s project or need as a BitcoinP2PLoan, or you can give it to a website which will lend it on your behalf for margin trading, in what is known as leverage. The third option is to get a bitcoin backed loan from a company specialized in providing loans against cryptocurrency pledge.

The former are riskier but the received interest rates are higher, which does not mean that margin loans are as safe as fixed deposits nor that they are an inferior choice. Deciding the type of loan that better fits your profile, or even if lending is for you, is a decision you must take carefully; here we will explain the basics to get you started.

Bitcoin Peer-to-Peer Lending Sites

Loan sites are fairly common on the fiat world, with the most popular ones closed for new investors due to high demand. Bitcoin lending sites are essentially the same, a centralized platform that connects borrowers and lenders, but marked differences in the way they operate exist.

ZOPA, the leading fiat lending website in the UK, is  one of the many platforms closed for new investors

How does Bitcoin P2P lending work?

P2P loans are negotiated in an open marketplace, where borrowers post their requests for lenders to evaluate and invest if they are convinced that it is a solid proposal.

Browsing the loan list on BitBond, one of the established P2P Bitcoin lending sites

The first big difference between fiat and bitcoin lending sites is the absence of credit scores, that is both positive and negative for the involved parties. Many people is left out of the credit market for not having a credit score, but the lack of it also makes the decision of whom to lend harder for lenders and still difficult for unbanked individuals to borrow money.

Identity verification is often mandatory, in an attempt to avoid fraud and theft. Submitting a national ID, confirming a valid phone number, going through video verification, linking social accounts and importing history from other trading or lending websites are among the procedures employed to identify a customer.

Given the greater uncertainty interest rates are usually higher than that of banks, representing a good option for investors, but at the same time lower than what local lenders charge, translating into a technical win – win for everybody involved. The average interest rate for Bitcoin loans lies around 15 and 25%, depending on the platform and perceived risk level.

Depending on the site additional options are available, including the possibility to add a collateral, get a loan filled by multiple investors, auto invest and diversify loans, pay or receive early payments and peg amounts to other currencies like USD.

What are the benefits of BitcoinP2PLoans?

Besides higher returns, investors have in Bitcoin lending a great opportunity to diversify their investments. These loans are borderless and you can spread your money all over the world in small (or not-so-small) chunks; in fact, doing so is strongly encouraged.

Commissions in Bitcoin lending platforms are usually smaller than in their fiat counterparts, and given the nature of cryptocurrencies you also save in deposit and withdrawal fees.

From the borrower’s perspective, Bitcoin enables a huge market from where to get economic aid. Requisites are less and processing times faster, overcoming the long waiting periods, a big issue with traditional banking and their bureaucracy.

The volatility of cryptocurrencies also offers an interesting opportunity for borrowers and lenders alike: they can take / fund a loan today and pay less / receive more if the market moves in their favor, more or less like if they were trading.

What are the risks?

Sadly nothing is perfect, and from time to time unwanted consequences arise from this activity.

The most obvious risk are defaults, not having access to credit scores and the lack of instruments to enforce the contracted obligations makes things easier for scammers to run away. Reputation systems exist but they can and have been cheated, being extra cautious is mandatory if you are going to put your Bitcoin in P2P lending.

BTCJam, one of the “big 3” just announced it will cease operating. Debts can still be repaid and funds withdrawn, but, am I the only one that believes a bunch of defaults are on their way?

But borrowers also face their own problems: the rating systems designed to fight scammers may also punish too severely honest borrowers if they default in a loan. Avoiding defaulting could lead a borrower to take another loan, translating into an enormous cost.

Lending BTC for Margin Trading

What is Margin Trading?

When a trader spots what he believes is a great potential to get profit, he can borrow some money to invest more than what he currently has. The amount a person can request depends on the funds he holds at the moment and the leverage that the broker or exchange allows. The leverage may be seen as a “multiplier”, it lets a user to take up-to that many times the money he has to place new orders in exchange of a daily interest rate.

To secure the investors’ money, sites usually employ what is known as a margin call. Basically, the account balance of a trader must be all the time over the borrowed amount plus any interests due, if that level is broken any open positions will be liquidated and the lenders will receive their money with profits back.

How does it work?

The only platform where lenders can actively put their money into a margin trading lending fund is Bitfinex. Users are free to set any amount they want (and own) of coins for lending, configuring the period and expected interest rate (decision which can be left to the platform, under the flashing return rate).

When a trader decides to use its leverage, open lending positions are automatically matched, serving first those asking for less in return. You can get anything from 0.02 to 0.1% daily, with an average of around 0.05%, depending on the base currency for the loan and the behavior of markets in the recent days.

Margin trading lending is not only available for Bitcoin, but also USD and nine altcoins: Ethereum, Litecoin, Ethereum Classic, EOS, Iota, Zcash, Dash, Ripple, and Monero. The average rates for margin funding are available in the statistics page on the Bitfinex website.

What are the Benefits?

Unlike BitcoinP2PLoans, margin funding loans are secured by automatic liquidation of a trader’s positions once they become unprofitable. This kind of loans also enables shorter terms, they can be issued for just a few days instead of the weeks or months required by lending platforms.

Interest rates also fluctuate with the market, giving the investor the possibility of obtaining better rates either by funding short-term loans or freezing his money in a longer one at a fixed rate.

What are the Risks?

Margin call most of the times work as expected, but sometimes a sudden market variation against the trader-borrower takes more than expected from his balance with the loss being passed to the lender.

Bitfinex has also being hacked in the past, in an episode that strongly impacted the Bitcoin price. They have probably doubled their security measures since the incident, but what already happened could happen again and you have to remember the investing maxim: invest only what you can afford to lose.

On August 2, 2016, the “security breach” (i.e. hack) was announced on the BitFinex blog

www.bestbitcoininvestment.com is a good source to generally learn more what you can do with Bitcoin and what you maybe shouldn’t.

Conclusion

Bitcoin lending, whether it is peer-to-peer or for margin trading, is a risky investment option, where defaults, volatility and other risks are the order of the day. But risk is an inherent part to investing, and if your nerves can afford dealing with it, Bitcoin lending offers an excellent opportunity to profit, and a market that is still novel and at your disposition.

If you follow common sense and put time into carefully choosing where to lend your money, the chances are that you will earn big and fully enjoy the benefits of investing!