Bitcoin is slowly but surely nosing its way into the mainstream world of business. About a year ago, it was only accepted by a handful of hipster coffee shops and a few artisanal food trucks. Today, huge websites like Overstock and Expedia have hopped on the boat—and the list is always growing.
A constant hum of activity bubbles under the surface of this mainstream emergence, as thousands of entrepreneurs compete to take advantage of a new and exciting market. One area that’s teeming with life at the moment is peer-to-peer (P2P) personal and small business loans.
What makes bitcoin good for loans? What services are currently on offer, and could bitcoin loans potentially become another avenue for small business funding?
The Mechanics
Bitcoin is not just a currency. A better definition would be an open-source, decentralised exchange, capable of hosting a whole range of financial products.
This exchange has many properties that are far more suited to the needs of an international marketplace than our current foreign exchange markets:
1. Accessible
The bitcoin network exists purely online, meaning anyone with an internet connection can send and receive coins.
2. Low transaction fees
Transferring coins over the bitcoin network is more like dealing in cash than card, in that there is no middle man. You only pay a small fee for maintaining the network.
3. Fast transfers
Forget waiting days for IBACS and SWIFT payments. Again, thanks to the more direct nature of bitcoin, transfers take minutes rather than days, no matter how large the geographical distance.
4. Anonymous
You don’t need to enter any personal details to start sending and receiving bitcoin. The only thing that’s logged from a transfer is the amount and the bitcoin addresses involved.
All these factors combined make bitcoin seem like an excellent choice for crowd-sourced loans. Its borderless nature opens your business up to literally a whole world of potential funders, as money can be sent from all corners of the globe quickly, cheaply, and securely. If funders don’t want to reveal themselves, they don’t have to, further encouraging participation.
The Services
The three main companies offering crowd-sourced bitcoin loans at the moment are BTCJam, BitLendingClub, and Bitbonds. They all operate in a very similar manner to their “traditional” currency counterparts, such as Prosper and Lending Club.
As a borrower, you make a profile and create requests for loans, stating why you need the money, and how much you want. The more loans you pay back on time, the higher your approval goes, which lowers interest rates and makes it easier to find funders.
As a lender, you simply browse the listings of prospective borrowers, and fund whichever ones you think offer the best or safest returns. Once the loan is paid back, you get whatever you put in, plus an interest rate determined by the website.
Bitbonds is the only bitcoin P2P lender that specifically tailors itself for business loans. Its mission statement is to close the funding gap of small businesses, to deliver higher returns than other fixed income products, and to help build a more stable and trustworthy financial system by distributing credit risk.
The German-based company is already receiving attention from investors, having just secured €200k (~$258) in funding from a combination of VC and angel investments.
The Problems and the Benefits
The biggest problem that any investor faces in bitcoin is the price fluctuation. The price was just £7.50 (~$12) at the start of 2013, but by November it had peaked at £750 (~$1227) a coin, making a 1,000% increase in value in just 11 months. The value then halved in just a matter of weeks.
With still relatively few companies accepting actual bitcoin as payment, those small businesses that accept bitcoin loans must still rely on selling to exchanges for traditional currency. In the event of a massive price increase, this could leave borrowers struggling to pay back the amount they owe in bitcoins on time.
So, what exactly is the benefit of using a bitcoin P2P lending service over one of the traditional currency options?
On the one hand, the use of bitcoin means borrowers have instant access to funding from all over the world, and the reduced transaction fees mean that everyone gets more value for money.
On the other hand, it’s a question of adoption. Prosper has completed billions of dollars worth of loans for its users, but none of the bitcoin lenders have come anywhere close to this. The reality is that bitcoin is not very widely used, which limits the usefulness of services like P2P lending that rely on large scale participation to make them work.
The Future
Nonetheless, the funding put into Bitbonds shows that expert financial investors have confidence in the potential of bitcoin P2P loans. If adoption continues to increase, it seems likely that bitcoin alternatives could surpass their traditional counterparts.
The world of cryptocurrency is evolving at a staggering speed, with some of the greatest development minds in the world working on new projects. With the emergence of “colored coins” from projects such as ethereum, we could even see whole financial services ported from the traditional web, to decentralised networks.
The implications of this are huge, as it would allow a liquidity and security in international financing like never thought possible. Companies like Bitbonds are currently only scratching the surface.
Nick Chowdrey is a staff writer for specialist freelancer and contractor accountants, Crunch. He specializes in writing about technology and business, and is a frequent contributor to a variety of online publications and industry blogs.
