This week we announced our seed funding round of EUR 200,000. In many conversations with investors and journalists we were asked why we provide bitcoin loans instead of euro or dollar loans. The short answer is: bitcoin loans are the way of the future of financing.
We have the bold vision that in a few years a good deal of global loan volume will be denominated in bitcoin and other digital currencies. While this might be obvious to many of our users, it is not to people who haven’t tried bitcoin, yet. So here are the 6 reasons bitcoin loans are the way of the future.
1. No bank account needed
In order to get a bitcoin loan you don’t need a bank account. This by itself creates a number of advantages over traditional loans. In many parts of the world the majority of the population simply doesn’t have a bank account. This excludes these people entirely from formal financial services. Can you spot the lighter areas in the map? That’s where only few people have accounts. And those who do have accounts are typically the wealthier ones.
Moreover, independence from banks brings further benefits. Banks typically don’t have very customer friendly opening hours. Applying for a loan online is easier and more convenient than going through a bank. You can apply anytime and don’t have to disclose your financial details to a person sitting next to you. This helps avoiding the gossip that often prevails in smaller communities.
Discrimination or rather the absence thereof is another great advantage of bitcoin and bitcoin loans. Recently a number of banks had closed bank accounts of people working in the adult industry. Minorities also often get discriminated against. All of this does not happen with bitcoin. The only thing that’s relevant for getting a loan on Bitbond is the economic creditworthiness of the borrower and the willingness of lenders to fund a loan. Since public listings are anonymous, there is no room for discrimination.
2. Global access
Where there is an internet connection, there can be bitcoin loans. Granted, not everyone has an internet connection as of today. Global penetration is roughly at 35%. But internet access is growing and promising initiatives like Google’s Project Loon are underway to bring the internet even to distant rural areas.
The big advantage of global access is that you are not dependent on people and banks in your proximity. One might argue that you don’t need a bank account if a friend or relative gives you an advance in cash. Yes, that’s correct, but it’s simply far less likely that you know enough people from whom you can borrow the amount that you need as quickly as you need it. With Bitbond borrowers reach a global lender base. This increases the chances to get funded for borrowers significantly.
It’s possible to get funding from wherever you are by lenders from all around the world. The internationality of the cryptocurrency ensure that bitcoin loans are the way of the future.
3. Lower fees
Banks typically run legacy IT infrastructure that is old, inflexible for new features, incompatible to the internet, expensive and difficult to maintain. And even if a bank upgrades its core banking system to a modern solution like SAP, things don’t get rosy. Compared to other banks, the upgraded system might be better and more cost effective.
But the really tough competition will come from companies that unbundle a bank’s service offering. Most banks won’t follow the unbundling trend. If a bank wanted to unbundle itself, it would basically have to break-up its big complex operations into many smaller specialized units. Something that usually only happens as a consequence of external influence as we saw in the buyout waves or court decisions.
Companies that focus on one particular type of service are more efficient and better at meeting customer needs than big conglomerates with huge overheads. One prominent example is the over-sized number of branches banks nowadays still maintain. Arguably, branches are still necessary. The convenience level of online banking is so far behind other web applications like social networks, SaaS companies or online shopping that customers are still forced to visit a branch every now and then. Imagine you had to visit a brick-and-mortar Facebook branch if you wanted to open an account with them.
The irony is that online banking already exists since the 90’s. It was one of the early commercial internet applications. But it literally hasn’t changed since then. That’s one of the reasons why online shopping – something where you would expect the necessity of physical presence – evolved much faster than online based banking services. The other part of the irony is that banking services are purely information based and therefore perfectly suited for the online world.
What does all of this have to do with lower fees of bitcoin loans? A platform like Bitbond doesn’t need a core banking system. It runs on bitcoind and ruby on rails – both of which are flexible open-source, programmable, built-for-the-internet software platforms. No branches are necessary because the user experience is far superior compared to online banking. The degree of flexibility and cost effectiveness of such an infrastructure can never be matched by a core banking system. Sending money around different regions of the world could in no way be done as fast and cost effective payment networks other than bitcoin.
Therefore the fees that a platform like Bitbond charges are significantly lower than those that a bank would charge for the same service. This makes bitcoin loans more attractive to customers from a cost perspective.
4. Lower interest rates
In regions where the availability of credit is low, those lenders who do exist exploit their regional monopolies. This leads to excessively high interest rates – often beyond 200% on an annual basis. Competition can help improve this situation. Since bitcoin loans face a global market, the potential competition will always keep interest rates at reasonable, market based levels. It’s that simple. Once monopolies are attacked and competition prevails, things start to become reasonable.
5. Financial stability
The size and complexity of today’s banks pose systemic risks on the financial system. If a bank goes bankrupt, the customers who deposited money with this bank lose funds that are beyond the scope of deposit insurance. At the same time other banks get affected by a bank’s bankruptcy through financial contagion. The systemic risks that are caused by the current banking system make institutions too-big-to-fail. Through their sheer size banks implicitly blackmail the government and central banks to give them bail-out guarantees should something go wrong. That effectively results in subsidies for the banks that – as some argue – are roughly as big as the bank’s profits.
With peer-to-peer bitcoin loans – even on a much larger scale compared to today’s loan volumes – financial stability increases vastly. The credit risk from lending is more distributed in terms of geography, industry, and number of involved lenders. Neither Bitbond as a platform nor the lenders who fund bitcoin loans are too-big-to-fail. Financial linkages to other institutions are not present. No bailouts required. Again, this even applies in a scenario where volumes get much bigger. Risks will never be as badly concentrated as they are in today’s traditional banking system.
6. Bitcoin Loans Are the Way of The Future Because they Are Simply Cool
Honestly, who would want a traditional loan when there is bitcoin. It’s faster, it’s more accessible, it’s more convenient and simply cooler. All information based services today are instantly available from the smart-phone in our pocket. There is no reason this shouldn’t apply for financial services. Bitcoin provides us with the technology to build and consume 21st century type financial services – let’s grab the opportunity and do so!