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     6 years ago (edited)

    I've written a couple of posts on my experiences ... though, here is some of the reasons:

    • Giving a loan denominated in crypto currency is a very bad idea due to the volatility. Price dumps, and the lender is at loss, price explodes, and the borrower can't repay, making a loss for the lender as well.
    • If the loan is for someone to realize some business plan, there is a significant risk that the business plan will fail, and the person will not be able to repay the loan
    • Some people borrow for other purposes - living an unsustainable lifestyle, gambling, etc, those people will most likely never be able or willing to repay.
    • Legal collection is hard enough domestically, internationally it's very difficult due to different rules etc.
    • There are lots and lots of scammers out there. ID-checks are often worthless as the professional scammers are experts at faking ID-checks - other scammers don't even mind to hide their identity.
    • Quite some lending sites have tried with different forms of reputation schemes. Reputation schemes where one can score reputation points by taking a loan and repaying it is bound to fail.
      • Some scammers are deliberately doing different kinds of "ponzi-style-borrowing", or paying high interests on loans just as a way to do a "reputation investment", increasing the amount they eventually will be able to run away with.
      • Even for the most trustworthy persons there is a significant risk that they eventually won't be able to repay their debt. A person may be taking significant business risks and be lucky for some few years, managing to pay a pretty decent interest rate on the loans taken - but then one year the business fails and the borrower goes bankrupt.
    • The banks actually do a pretty decent job on calculating risks and giving loans - that's their primary business. Crowd-funding may have some competitive edges, but one should think three times before giving a loan - why doesn't the borrower rather go to the bank? Often the reason is one out of two - the bank is considering the risk as too high, or the borrower is just a scammer, planning to run away with the money borrowed.
    • With a high risk and high default rate, it's needed with relatively high interest rates to defend the losses - but high interest rates do scare away the good borrowers. There are three kind of persons who don't mind paying a hefty 50% APR on a loan:
      • A scammer with no intention to repay the full loan amount don't need to worry about a high interest rate
      • A person who is bad at counting and economics will probably not be afraid of a high interest rate - but it's very risky to borrow money to such a person.
      • Some risk-takers may be able to turn over money with several percent profit weekly, a 100% APR loan may be a good deal for both parts. Perhaps the profits came from drug dealing, they will probably not be able to repay the debt after they get arrested. Other people may be able to create fantastic returns on the money invested through sheer luck - all until one day they are very unlucky and lose everything (like Einar Aas).

    Also, I'm horrible at collecting debt - going around with a baseball bat and visiting people, that's not really my favorite hobby.

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     6 years ago 

    Thanks for giving a detailed list on why it can be dangerous to lend cryptocurrency.

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