P2P & marketplace lending have had a profound impact on millions of individuals and small businesses around the world which had been left “credit-deprived” by banks in the wake of the 2008-09 financial crisis. Alternative lending startups like Lending Club, Prosper, and OnDeck pioneered a new form of lending that eliminated the middleman (i.e. the bank). The effect has been tremendous with Morgan Stanley predicting P2P lending to reach a global size of $490 billion by 2020. Similarly, the birth of block chain and Bitcoin in 2009 was an unheralded affair. The cryptocurrency remained in the fringes until 2014 when it burst onto the global stage as its value rose exponentially. It now commands a value of $2,285 per Bitcoin as compared to a value of approximately $1 in February 2011.
Bitcoin has a total market cap of almost $40 billion. Even Warren Buffet would be proud of such a return. Till now, both of these fintech revolutions (Bitcoin and P2P lending) had been operating independently without much interaction with each other. With the advent of Bitcoin-focused alternative lenders like Bitbond, BTC Jam, and BTC POP, we are seeing the congruence of these two technologies for a more sophisticated lending product.
Let’s analyze how Bitcoin will be able to change the alternative lending landscape:
Branching out globally
When you lend in one single country, you have one-sided exposure to the country’s economy. So the default rates tend to follow the economic cycle of that particular nation. Lending internationally diversifies the country’s risk.
All alternative lenders, such as Prosper, Zopa, and Lending Club, let you invest in borrowers in your own country. If, as an American, you want to lend in the UK, the lender would have to bear the currency exchange risk. On the other hand, this is not the case when the loans are made and paid in BTC; it would diversify the loans geographically, and a lender can have borrowers from all over the world without having to take any currency risk. The diversification in itself is something of immense value as it allows sophisticated high net worth investors to de-risk their American holdings by investing in a global portfolio of borrowers.
Even if you are comfortable taking on the currency risk, welcome to the world of forex exchange where you will have to shell out 2%-3% every time you convert. This is especially true for smaller amounts as is prevalent in the alternative lending market. So, if a borrower is able to take advantage of the lower rates available in the US, he still ends up in the red as he has to pay 2% each (i.e. 4% combined) when he converts his local currency to USD for paying his loan, and vice-a-versa. Any superior returns generated by diversifying to another country would be gobbled up by your bank when it converts that Indian Rupee or British Pound into the US Dollar.
In contrast, the transfer changes for Bitcoin are a paltry 0.06%. It makes a lot of sense to execute cross-border transactions via Bitcoins to leverage this clear discrepancy in conversion rates. It allows the profit to go to the real risk-taker (i.e. the cross-border lender).
Sans a Bank Account
Bitcoin can work without a bank account; it only requires an internet connection. This has the opportunity to democratize lending as banks would not remain the sole custodians of delivering financial services, especially in developing countries. In many Latin American countries, the penetration of bank accounts is less than 30%. The Internet in comparison has been spreading like wildfire with 63% penetration in Latin America. Bitcoin lending is possible to that additional 33% of the population, which is otherwise totally disenfranchised from the formal economy.
Tackling Bitcoin price fluctuation
One major issue faced by Bitcoin lenders is the volatility experienced versus other currencies. When the Bitcoin prices rises against a fiat currency like the euro or dollar, the borrower needs to pay more than the initial face value of the loan (when denominated in his country’s fiat currency), and vice-a-versa. This exchange rate fluctuation would not be important if the borrower’s source of income is also Bitcoin. But as 99% of trade is still in fiat currencies like the dollar and euro, there is major risk involved for both lenders and borrowers.
To take charge of the exchange rate fluctuations, P2P platform Bitbond offered a loan type where the base value is denominated in US dollars. The loans are pegged to the Bitcoin vs. USD exchange rate for monthly installment. The value of the payment is held constant in USD. The number of Bitcoins that is to be repaid fluctuate along with the exchange rate.
There are multiple closed markets in the world which are not accessible to outside investors. China is the prime example. The regulatory environment in developing countries like India and China are so onerous for a foreign investor that they give up on the entire market. Thus, over-zealous regulators end up harming the consumer, the so called benefactor of such regulations, in the first place.
Without access to credit, the borrower loses an opportunity to grow and enter a formal credit economy. Bitcoin sidesteps all these issues. Being a stateless currency, there is no regulator, and you just need an internet connection to take part.
Alternative lending is now mainstream. Bitcoin and other cryptocurrencies have captured massive investor interest and are on their way to disrupting how currencies and many financial services work. Bitcoin lending is the next stage of financial evolution and will allow alternative lending to grow roots across the world. It will allow for faster and cheaper transactions on one side; and as more trade gets denominated in Bitcoin, it will remove the inherent currency risk evident in all cross-border lending. The most important thing is that it removes government regulators and mega banks as gatekeepers to capital. This autonomy is the biggest innovation of Bitcoin lending.
Written by Heena Dhir.