Bitcoin peer-to-peer lending
What is Bitcoin peer-to-peer lending?
Bitcoin peer-to-peer lending is essentially decentralized lending with cryptocurrencies. There are three types of cryptocurrency lending:
- Peer-to-peer lending (Borrower is a private person)
- Peer-to-business lending (Borrower is usually a SME)
- Margin lending or margin funding (Borrower is a margin trader)
Bitcoin peer-to-peer lending allows borrowers to access quick, unlimited funding with fewer barriers and allows lenders to receive higher profits.
One of the biggest advantages of cryptocurrency lending is that you are not limited by your geography. Since cryptocurrency is a global currency, borrowers can access funding from lenders around the world. Lenders do not have to bear the currency exchange risk associated with lending money internationally with fiat currencies. Investors can reduce risk by diversifying their portfolios with borrowers from a variety of different regions.
Peer-to-peer lending was offered by BTCjam and Bitlendingclub (Loanbase) but both actors have stopped their services during 2017. Other actors are BTCpop and Nebeus.
Peer-to-business lending is offered by Bitbond. We have used Bitbond with unprofitable results 2015-2016. However, they have shaped up the platform and we are about to give them a try again.
What is the Expected ROI?
Cryptocurrency lending has a significantly higher APR than if you were to keep your money in a bank. How high that APR is depends on a variety of factors. Different cryptocurrencies will have different interest rates. These rates are set by the lender themselves and will fluctuate constantly according to supply and demand.
At Bitfinex and Poloniex the yearly interest rate can vary from 0.1% up to 300%. At both these platforms the interest rate is set per loan and can vary considerably from day to day. Therefore, an ROI of 300% is very rare but we have seen this kind of ROI on occasion. Of course, you will not receive it for over a year, as it corresponds to a 0.25% daily interest rate. This means that you can receive a 0.25% interest rate per day for a certain amount of days, usually around 2 to 10. The normal interest rate is around 4 to 12% for cryptocurrencies and around 15% for USD on the Bitfinex platform. Poloniex usually has a somewhat lower interest rate. We always update the current lending interest rates at our Bitcoin lending page.
According to Bitbond, the expected average rate of return is 13%. So if you lent $1,000, you would earn $443 on your investment after three years. If you were to keep your money in a savings account, you would typically earn an APR of 0.8%, meaning you would only earn $24 in three years.
Is It a Safe Investment?
The higher the potential yield of an investment, the higher the risk involved. Thus, while your potential profits from margin lending, peer-to-peer lending or peer-to-business lending will be much higher with cryptocurrencies, your potential losses are also increased.
One reason that Bitcoin lending is risky is that it is a higher volatility versus other currencies. As previously mentioned, it is a good idea to lower this risk by diversifying the regions where your borrowers are located. Furthermore, you should spread out your funds among numerous exchange platforms.
There is also the possibility that a borrower will default on their loan and fail to pay you back. In margin lending, the funds in your account are used as collateral to protect against losses, and that balance determines the limit of how much you can actually borrow. Thus, there is less risk for the lender in margin lending than in peer-to-peer lending or peer-to-business lending.
Lending with exchange platforms helps to protect you against the possibility of a borrower failing to repay their loan. However, in return for this service, this platforms will take a percentage of your lending profits. Bitfinex and Poloniex charges 15% of the fees you collect from margin lending. Read more about the fees in our Bitfinex review or Poloniex review.
How to Start Lending?
It is a very simple and easy process to start lending on Bitfinex and Poloniex. All you need to do is to sign up and deposit any cryptocurrency. You can exchange the cryptocurrency at the platform to the currency with the best lending rate for that moment. For the moment, none of the platforms allow fiat currency deposits.
With Bitbond, it´s very easy to sign up and deposit Bitcoin or fiat currencies. Remember that most loans are actually done in USD on Bitbond. That means you will not take advantage of a rising Bitcoin price during the loan.
Lending platforms are also beneficial in that they allow you to automate your lending, so less manual work is required. For example, Bitbond has an AutoInvest tool that allows you to set filters to identify borrowers you are interested in and those you are not. Bitbond has a repayment fee of 1.0% for all loan terms, but it may be higher or lower for specific lenders. The minimum deposit for AutoInvest on Bitbond is 1 Bitcoin.
On Bitfinex and Poloniex there are automated functions for any amount of deposit. In addition, there are certain parameters that you can preset, such as the minimum interest rate for auto reinvest.