If you are looking to start a business, consolidate debt, or handle a minor emergency, or if you want to skim a return for yourself while helping people with those problems, then bitcoin lending might be worth looking into. But beware: you’ll need a healthy appetite for risk and a portfolio that can afford to sustain a loss every now and then.
What Is BTCJam?
BTCJam is the best known in the category of “bitcoin lenders.” However, BTCJam is not a lender in itself. Instead, the company provides a forum that matches borrowers with investors, screening both for quality and handling the processing of payments between the two (while charging borrowers a fee for its services). Anyone with a fully verified profile and willingness to borrow bitcoins can create a loan request that describes the purpose, amount, repayment period, and the rate of interest that the borrower is willing to pay. Interested lenders (BTCJam uses the term “investors”) can then contribute all or part of the loan amount, which funds when 70% or more of the amount requested is pledged by lenders.
Investing In Bitcoin Loans
Notes are rated based on the borrower’s credit profile. Credit profile is determined based on factors such as recommendations from friends, social media and address and income verifications, and the payment history on previous loans. FICO scoring and credit bureau records were conspicuously absent from user credit profiles, though users are asked during the income verification phase to provide their credit scores. This is helpful to borrowers with poor credit histories and borrowers located in parts of the world where credit reporting isn’t well developed, but denies lenders a valuable source of information concerning repayment history. On the day that I checked out the site, most prospective borrowers appeared to have a “C” rating, which means that their income and identity have been verified, but they haven’t established a payment history on the site yet.
BTCJam provides a statistical probability of default and calculates the annual percentage rate of the note. Loans are made and must be repaid in bitcoin, but borrowers have the option to hedge their loan by linking to a fiat currency exchange rate. This means that a borrower doesn’t have to worry about getting crushed in a rising price environment, nor must the lender worry about being repaid in coins that are worth less than when the loan was made. BTCJam recommends that all loans be tied to a fiat currency, unless the borrower is either a bitcoin miner or gets paid in bitcoin.
At press time, BTCJam listed 196 loans waiting to be funded, 27426 bitcoins lent out and 5052 loans repaid. Rates on loans waiting to be funded ranged from 12.11% APR to 1290% APR (the small amount and nonsensical description of associated with that rate led me to believe that it was some kind of joke). The vast majority of loan requests appeared to be for bitcoin mining equipment, with debt consolidation being the second most popular purpose. Most had rates in the 10% to 25% APR range, which makes them comparable to a credit card advance for rates. That’s probably fair, since the loans are unsecured.
Risky Business
What happens if a borrower fails to repay the amount borrowed? Apparently, besides lenders losing their money and borrowers getting a bad repayment profile, nothing happens. The company’s terms of service suggest that legal action might be taken, but that probably isn’t likely. Since the borrower pays BTCJam’s fees upfront, the company gets paid whether the note is repaid or not.
BTCJam advises lenders to spread their funds across multiple loans to limit the risk of loss due to borrower default. However, this may not be sufficient protection against other sources of concentration risk. Concentration risk raises the likelihood of incurring significant losses across an entire portfolio of loans. For example, if the majority of the investor’s loans are to borrowers who operate mining rigs, then an external event that disrupts the profit potential of that activity could cause many borrowers to default at once, regardless of prior history.
Regulation Free
Though the company is located in the United States, BTCJam seems to have made no attempt to comply with US tax laws governing income reporting, or state or federal laws governing lending in general, and usury specifically. Even payday lenders, which many believe are hardly better than commercialized loan sharks, are required to provide truth in lending statements to borrowers (whether they possess the financial savvy to understand them or not).
Like many bitcoin operations, the company seems to operate in a vacuum created by the failure of regulators to notice it. This is not to say that BTCJam does bad business, just that it isn’t regulated. Depending on your perspective, this may be either a good or a bad thing. However, it doesn’t take much in the way of consumer complaints to attract unwanted attention. Therefore, lenders should be aware that regulatory action could create circumstances under which all or part of an investment would be lost. On the other hand, regulatory action poses little or no risk to borrowers.
If you have a little extra coin around and want to put it to work helping others, then bitcoin lending with BTCJam might be for you. However, if you hate losing money or can’t stand risk, you might be better off staying away.