Peer-to-Peer (P2P) Bitcoin lending is my favorite way to invest my bitcoins. P2P lending is when you give somebody money, and expect to get it back over a given period of time with interests. Compared to investing in cloud mining for example, you can know exactly how much you can expect to get back from your investment, and over which period of time. You also have the possibility to talk directly to the people you are investing in, talk about their projects and drive in life, and even make some friends in the process.
However, lending money always comes with risks, whereas it’s with bitcoins, dollars, or any other currency. People can have problems paying back the loan, they can just disappear suddenly, the website where you lend money can go bankrupt … In this article, I will share with you the strategy that I use to reduce the risk that comes with Bitcoin lending.
The First Rule: Diversify
I will start with the obvious: you should always, always, always diversify. For P2P lending, it means only going to trusted websites (for example my favorite, BTCJam), but never having all your coins in a given website. For example, invest some of your bitcoins in Bitcoin lending, some other bitcoins in cloud mining, and the rest in other kind of investments, or in a secure wallet in case an investment opportunity shows up.
It also means diversifying on the Bitcoin lending site itself: never put most of your money in a given loan, even if you think it’s a safe loan. You never really know who is behind the loan, and even a trusted person can have issues and never be able to pay you back. As a general rule, I never invest more than 0.5 Bitcoin into a single loan.
The last section dealt with the obvious and high-level strategy for Bitcoin lending. In this section, we are going to see what are the fundamentals of my investing strategy when it comes to lending. I developed a set of criteria to help me quickly assess if I should consider investing in a loan or not. And as an example, I will use my favorite website BTCJam. However, this is perfectly adaptable to other lending websites.
The first step is of course to have an account ready with some bitcoins loaded. You can for example follow my step-by-step guide on how to invest with BTCJam.
— CryptoCoinTalk (@cryptocointalk) March 2, 2015
Here, my first strategy is to filter these listings by the BTCJam score on the left, to see if there are ‘safe’ loans to invest in first. This score is basic indication generated by the lending site to indicate you quickly the risk factor of the loan. However, we will see that this score is not enough to make a good investment.
As you can see, usually there aren’t that much safe ‘A’ listings, so you will nearly for sure have to dive into lower listings as well. I never invest in any listing that has a lower rating than ‘C’.
To illustrate my strategy on individual loans, we’ll take two examples: first what I consider to be a ‘good’ investment, and then a ‘bad’ one. Let’s start with the good loan.
There are many things I am looking at on each loan page before investing. First, I check the listing rate, on the bottom center of the image. Of course I want the person to have his/her identity verified, with personal references, but I also want that at least some kind of financial record to be verified: Paypal, Credit Card, Bank, etc… I also like when the person’s income is verified, so he/she can repay you even if the projects fails.
Then, I look at the reputation: if the person has negative comments, it ends here. If the person has at least more than 10 positive comments, I continue examining the loan.
I also look at the APR on the top right side. This is the annual return you can expect from this investment. Usually, it will be around 20-40%. Be cautious about unrealistic values here, a huge APR can be attractive but usually indicates a scam.
After that, I look at the active/repaid ratio on the left side. You can simply get this ratio by dividing the active loans (still to be paid by this person) by the repaid loans. Here, this person has a ratio around 0.3, which is good, as I usually aim for a ratio below 0.5. When the ratio is above 1, just run away, as it means this person has more debt than repaid loans and is quite likely to never pay you back.
Finally, I look at the project itself. I like when it’s about taking the loan to make another investment, like cloud mining, investing in real estate, buying a website, etc. It’s actually not the case here, as this person wants to use the bitcoins to do trading. But this person seems to be trustworthy looking at all the numbers, so I actually invested in this loan and got repaid.
Let’s apply the same criteria as before. This person has good listing verifications, but has a bad score due to other reasons. For example, no reputation at all so far.
Then, the APR is completely of the roof at 298%! This doesn’t seem realistic at all, especially as the person says he wants to buy mining equipment.
Finally, there is the active/repaid ratio. Because this person as never repaid any loan but has some active ones, the ratio is in theory… infinity! I never invest in anybody with a ratio of more than 1, so just for this reason alone I would skip this loan.
Now that we saw my basics criteria for Bitcoin lending, let’s dive into more advanced tactics. You can actually learn more about the person that is asking for the money that what is displayed on the loan page.
As you can see, this person paid all other loans, and by clicking on the individual loans I checked that there was only good comments and that they all went well.
On the other hand, this is an example of a borrower that has several active loans, but still wants to get more money.
This is a bad sign, as it usually indicates this person is just raising as much money as possible and is ready to disappear with the cash.
On the same profile page, you can check other information about the borrower. I like to look for example at personal references. These are more than just evaluations: it’s personal referrals from people that know the borrower.
In that case, one of these persons was a well-known scammer on the website. Of course, it doesn’t indicate that the borrower himself is a scammer, but I am more cautious when I see such references in a borrower’s profile.
Finally, I also get a detailed look at the project itself of the borrower. For example, if the person wants to invest in cloud mining on a given website, I go visit it and check that this website has a good reputation as well.
After The Investment
Based on all these criteria, you can now ‘safely’ invest your bitcoins. Of course, nothing will never guarantee that you won’t have any people not paying back, but at least it greatly reduces the risk to have some rules to follow when deciding to invest or not.
Now, that’s not the end of my strategy. Because quickly, you will have money coming back at you that you will be able to reinvest. I usually wait until I have at least 0.25 BTC back before considering investing again in a new loan. I also regularly buy new Bitcoins (when the Bitcoin price index is low) and inject them into new loans.
I hope this article helped you to define your own investment strategy for P2P Bitcoin lending. If you have other tips for Bitcoin investment or you want to discuss the strategy I shared in the article, please share in the comments below!…