Types of Bitcoin Loans and How to Get One
If you find yourself in need of a Bitcoin Loan there are a few different options for you. This article is meant to shed some light on your different options and help you find the right Bitcoin loan for you.
Due to Bitcoin’s nature as a hard, finite, P2P, trustless money. Bitcoin loans work differently than the regular USD or other fiat currency loans we are used to. The result is that all Bitcoin loans become P2P just in different ways.
The different types of Bitcoin loans are:
- Margin lending on Cryptocurrency exchanges
- Collateralized Bitcoin Loans
- Hybrid Crypto/fiat Bitcoin Loans
- Reputation Based Bitcoin Loans
Margin lending on Cryptocurrency Exchanges
By far the largest and most used Bitcoin loan happens in the form of margin lending. For those that are not familiar with the term, margin lending is essentially a collateralized loan within an exchange. Often called trading with leverage, a seasoned investor can increase his position without depositing more money. What this boils down to is traders borrowing Bitcoin from other traders within the exchange to sell (short) Bitcoin they don’t have, or buy (long) more Bitcoin than they can afford to purchase with their existing funds.
Different exchanges offer different collateral and call limits for margin lending. When margin trading, it is very important to keep an eye on prices as if your collateral gets below a certain percentage of the amount borrowed the exchange will automatically sell your collateral. This process is called “Margin Call”. So for example if you borrow.
✓ Good to use when:
- Short Term Trading
- Fine with leaving collateral coins on exchange
- Low volatility and low borrowing rates
❌ Bad to use when:
- Highly volatile price (all of crypto falls under this)
- Unexperienced
- Don’t trust centralized exchanges
Platforms:
Interest Rates
(1%-100%+ in BTC depending on market conditions)
Collateralized Bitcoin Loans
Btcpop.co is a straightforward peer to peer Bitcoin lending platform which allows loans backed by altcoins or p2p shares as collateral. The benefit of using a peer to peer service like this over margin lending is set interest rates, and no margin calls unless you default on repayment. In order to get a P2P loan funded you will have to create a loan proposal with terms and collateral you set. Then individual investors from around the world will decide if they want to invest with those terms and fund your loan.
Btcpop requires verification for borrowing Bitcoin but not investing. It does however offer a set rate Instant Collateral loan for non-verified borrowers.
✓ Good to use when:
- Long Term Trading
- Lots of Cryptocurrency collateral
- High volatility and high margin lending rates
❌ Bad to use when:
- Don’t have good cryptocurrency collateral
Platforms:
Hybrid Crypto/fiat Reputation based Bitcoin Loans
Hybrid Crypto/fiat loans are loans borrowed in fiat terms (USD, EUR, CNY) but paid out and repaid in Bitcoin. Bitbond is the largest of this type of lender, though Btcpop.co has the option but it is rarely used. In these types of loans, Bitcoin is basically just used as a short term means of transferring value. So the loan is taken out in USD terms with USD interest for example. So when investors invest in this type of loan they are effectively selling at that price to get paid back that amount of Bitcoin in the future. Borrowers received the Bitcoin, but are effectively buying at that price. So if the price goes up they will have to pay back less Bitcoin. If the price goes down they will have to pay back more Bitcoin.
Both of these platforms are peer to peer and reputation based. So if you want to borrow, you will have to link your online profile to your real world identity. Similar to borrowing from a bank, investors will look for signs of credit worthiness and history before borrowing any significant amount of money. This can be done through linking reputation based accounts like ebay and social media accounts for further identity verification. Of course the best way to build a P2P lending reputation is to have a good repayment history like fiat banks. This can be done by taking out small loans and paying on time and gradually borrowing more.
✓ Good to use when:
- Can’t get a traditional fiat loan
- Want to use cryptocurrency but avoid some volatility at borrower
- Have good means of buying and selling Bitcoin with fiat
- Good risk management for repaying
❌ Bad to use when:
- Long term positions you don’t want to realize (taxes selling BTC)
- High fees buying/selling BTC
Reputation Bitcoin Loans
True P2P reputation based Bitcoin loans is a slightly battered industry due primarily to price volatility causing lots of defaults.However, regulatory uncertainty and lack of collections have also hindered growth. Of the once a thriving and growing industry dominated by venture capital funded Btcjam.com and popular BitcoinLendingClub.com, Btcpop and Bitbond are the only that remain in the now much smaller young industry.
Reputation only P2P Bitcoin loans are plagued by drastic price volatility and lack of meaningful collections system. So getting a reputation only based Bitcoin loan can be quite tricky as not many investors are willing to lend out their Bitcoin to strangers they don’t know and can’t easily collect from. Collateral and a significant repayment history and is really the only way to get this. Though Bitbond has found some success focusing on small business loans specifically for ebay stores leveraging that existing reputation system.
✓ Good to use when:
- Valuable online reputation to leverage
- Long time user
- When your able to slowly build up a payment history
❌ Bad to use when:
- Need a quick loan
- Want low interest rates
Platforms:
Overtime I am guessing this article will age as the industry grows and matures. There are significant hurdles that need to be overcome before its as easy to get a Bitcoin loan as it is to get a fiat loan. However, as cryptocurrency continues to rapidly grow, one can expect the Bitcoin Lending industry to follow.