What is Peer to Peer Lending and how does Bitcoin fit?
The p2p Lending Market
The peer to peer lending market started in 2005 with the launch of UK’s Zopa, followed quickly by mega-platforms Prosper and Lending Club in the US. These platforms connect borrowers and lenders directly, bypassing the intermediaries such as banks and credit card companies that have monopolized the lending market. This has resulted in much better returns for investors and often lower interest rates for borrowers.
Peer to peer platforms are attractive to both borrowers and lenders for a number of reasons. There is a much lower minimum loan threshold, allowing borrowers to, for instance, consolidate credit card debt at much lower rates than offered by credit card companies. On the lending side, investments can start at $25 with no fees are taken, offering those with just a small amount of savings an investment vehicle. Interest rates vary from 6% to as high as 30%+ depending on risk profile. Compare that to the 0% paid by banks to lenders – otherwise known as account holders – and it becomes clear why p2p platforms have taken off.
And great strides have been taken in vetting borrowers, resulting in decreasing default rates, which were initially rather high. Borrowers are put through credit checks and FICO rating processes to judge credit worthiness, and defaults are passed off to the same debt collectors utilized by the banks. However debt is generally not asset-backed, losses are not insured, and there is not the same personal relationship with borrower usually enjoyed by bank lenders – though repeat p2p borrowers do enjoy better terms. On the other hand, lenders are able to pick the particular borrowers they would like to bankroll, and many of the platforms have auto-diversification programs that spread investment across multiple borrowers and risk profiles to maximize return and minimize risk. Until now, default rates have remained consistent with the wider market.
As these companies matured, they began to securitize the loans attracting massive institutional lending, which served to answer any lingering questions as to their ability to achieve necessary liquidity levels to create a sustainable market. However, what was meant initially to offer a retail alternative to institutional lending has become largely institutionalized. Massive lending groups have come to account for the vast majority of lending capital and thus, in the words of Nav Athwal, Cofounder of RealtyShares, the “very institutions the platforms were meant to disrupt…are now its dominating figures”. The dynamic has led to massive increases in p2p loan volume, set to reach a whopping $77 billion in 2015. A number of specialized lending platforms have emerged, including the incredible Kiva (which actually predated the for-profit platforms) and Zidisha, which provides lending and borrowing services to the global market.
And along came bitcoin.
Bitcoin p2p Lending
Bitcoin p2p lending has extremely lofty ambitions. It offers the potential for borrowers in unbanked regions or in countries with unstable currencies, governments and/or banks the ability to secure loans without intermediaries. This could be a very attractive vehicle for loan seekers in, for instance, Venezuela, Argentina or Cuba, where banking restrictions and horrible currencies preclude mainstream borrowing. Ditto India or Nigeria, where capital is extremely expensive.
A browse through the listings at bitbond, the largest and best of such bitcoin lending services, shows a mixed composition of borrowers. Many of the loan requests, as one would expect, are from bitcoin-enthusiasts looking to finance crypto-related business ventures. So one will find a good number of retail bitcoin miners or local bitcoins sellers looking to scale up, or crypto-entrepreneurs from low penetration markets looking to, for instance, install a bitcoin ATM.
A bitcoin lending platforms is the obvious place for these borrowers to seek investment, as mainstream outlets will find it hard to understand their business models. Ditto bitcoin entrepreneurs who need debt consolidation, but are earning money off-book in various cryptocurrency fields. And of course, not only does one reach a sympathetic audience, good street credit within these platforms can build up reputation within the wider bitcoin community, which is as good as (bit)gold for crypto-entrepreneurs.
And there are some surprises as well. There are postings from many users located in Brazil seeking micro loans for business equipment or to help with moving expenses. And we found a few users with no overt connection to bitcoin. One such user sought to cover book costs for her child’s first year of college. The loan of nine bitcoin was covered in a week by a total of 353 different lenders. Doing some good, while spreading the gospel of bitcoin.
Bitcoin lending platforms offer greater return potential due to the higher risk of loan default. This is not necessarily due to the borrower’s country of residence – for instance, Kiva has a default rate of 1.2% in it’s 10 years of operation. That’s exceptional – it is a better performance than, for instance, the average rate of US bank loans during the same period. So location is most likely not the main risk factor, though it does play a part.
However, using bitcoin for financing does increase risk substantially. There is no method of debt collection -though a recent ruling in Kentucky required a local man to pay back a bitcoin loan taken two years previously. However, this would be the first bitcoin loan ever to be collected and, from the quoted article, it does not seem likely despite the court ruling. The likelihood of payback, even more so than in traditional p2p lending platforms, is largely determined by the lender’s thoroughness in vetting potential borrowers, and picking who to bankroll wisely.
That being said, there are additional innovations that are being introduced to mitigate risk. BTCPop offers default insurance up to 75%, and has introduced a collateral system to asset-back loans. All the platforms have become much more discerning in filtering borrowers such that, according to bitbond CEO Radoslav Albrecht, acceptance rate now hovers around 40%. And of course, the platforms are cooperative in working with lenders and third party collectors to go after borrowers.
In any event, p2p lending seems to have established itself as a long term alternative to mainstream lending options; whether or not bitcoin plays any part in this market is tbd.