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At its philosophical core, Bitcoin goes against tradition finances and lending as we know it. Also considering its anonymity and lack of central control, it may be a questionable medium to lend money to a third party.
On the contrary, Bitcoin loans have been booming for a while and established platforms have safeguards in place for both lenders and borrowers. In most cases, lending platforms are decentralized peer-to-peer, similarly to Bitcoin and most other cryptocurrencies.
How does a peer-to-peer exchange work?
Lending directly to strangers to doesn’t sit well with anyone. Heck, even lending to friends or family is questionable since there is no guarantee you will get a return on your money. Vetting borrowers for lenders is the biggest challenge this industry has always faced, but peer-to-peer (P2P) lending has been loosening things up.
A P2P lending platform acts as a centralized authority to match borrowers and lenders and act as a middleman so nobody gets swindled out of their Bitcoin. Such loans in this market, regardless if it uses Bitcoin of fiat, would usually be unsecured loans, so there is always a certain risk of defaulting at hand. Platforms may curate borrowers based on their past transactions and their likelihood to pay, rewarding those that pay on time.
Since Bitcoin is the type of currency that can be sent out and disappear with scammers since it isn’t connected with traditional financial institutions, a certain level of trust must always be present. This is why using well-established lending platforms is the only sane way to go about lending Bitcoin since scammers are rampant on forums and other online communities.
Who needs to borrow Bitcoin the first place?
Believe it or not, Bitcoin is gaining traction as an extremely popular medium for transferring wealth across borders, especially in developing countries. There is no names attached, harsh transfer fees and can be held without a traditional bank account.
One example of someone needing a loan would be someone in a small town in Brazil that want’s to start a bakery, but has no means of financial support. Unlike in developed countries, opening a bank account is difficult in Brazil and more than half of the adult population doesn’t even have a bank account. Without even having access to traditional financial services, accepting Bitcoin as a means to start his/her business would be a blessing.
Volatility and Lending
If you check Bitcoin's price every morning, you notice its insane volatility in comparison to stocks, commodities, and forex. Long-term holders of Bitcoin only care about their Bitcoin holdings and consider fiat exchange rates to be temporary.
On the other hand, the average person will mostly care about how much of a return in USD they can get in the end. The wild price swings in Bitcoin can make a repaid loan be at a loss or a huge gain depending on the trade margins at the start and end of the transaction. This should be taken into consideration if you are mainly looking to make profits in fiat rather than building up your Bitcoin stash.
The idea of P2P lending is not new and it will probably only gain in popularity now that Bitcoin and other cryptocurrencies are in the mix. If you are a long-term holder in Bitcoin, this can be a way to build up your wealth passively, without having to exchange into fiat and go into more traditional investment methods. As always, be diligent about researching every Bitcoin lending platform on the market to get the best transaction rates and reduce your risk while lending.