9 mins

Bitcoin Investments → Cutting Through The Fog

Chris Grundy
Feb 20, 2018

Bitcoin investments have several benefits over conventional P2P lending platforms:

  • As the investments are essentially borderless, it is easy to diversify your investments globally
  • You can gain access to high-interest rates and gain higher returns
  • Fees for both investors and borrowers are significantly lower

However, to take full advantage of these benefits it is important to understand the model in some depth.

Here we will look at some of the more important aspects of bitcoin investments, and try to cut through the fog.

Please note that we are not providing any investment advice in this article, and what we say should not be interpreted as such.

Making your first bitcoin investments

No doubt you will already have done some research to have got as far as you have in terms of considering making your first bitcoin investment.

Perhaps you have experience in other kinds of P2P lending and now you are wondering if there are better returns to be made on a bitcoin platform.

You might be a little reluctant to grasp the nettle until you feel more secure that doing so offers the right risk benefit profile for you. Maybe the whole concept of bitcoins makes you feel a little uncomfortable.

Deciding to make your first bitcoin investment doesn’t mean that you have to jump in at the deep end; in fact, quite the reverse.

Continuing with the same metaphor, an advantage of investing in a bitcoin P2P lending platform is that you can ‘dip your toes in the water’ first.

In other words, if you feel tentative about investing in bitcoin, then you can make your first investments at a very low level that you feel comfortable with.

Once you build confidence, you might decide to increase the level of your investments.

Once you do decide to try the waters, the mechanics of doing so are easy. Taking Bitbond as an example, you simply set up an account on the platform, log in, and start looking at the loan requests.

You can gain information on the borrower such as repayment history, the reason why the loan is being requested, the interst rate, and other details that help you build up a picture.

Once you find a borrower with whom you feel comfortable, you simply decide how much you want to invest and confirm the deal; it really is as simple as that.

(Check out: how to earn bitcoins in Poland)

Ensuring high ROI on your Bitcoin Investments

Clearly the reason you are investing in bitcoin loans is to maximise your ROI, so are there any tricks for ensuring that the ROI on your bitcoin investments is appropriately high?

In fact, there are; essentially you can choose to lend only to borrowers with whom you are comfortable that they will repay the loan as agreed; you can diversify your bitcoin investments to make the best of current market conditions and balance return and risk; and you can make use of historical data that is available in the public domain to create a suitable investment strategy.

Let’s take a closer look.

Understanding your borrowers

In our social media orientated world it is easy to connect with the loan applicants you consider maybe sufficiently worthy to lend to. By doing so you can build up a rapport that will give you a greater insight into their integrity and ability to repay the loan.

Essentially you will get to know them and establish a relationship through which they will make a real personal commitment to honour the deal. The larger the investment you are considering, the more important it is to ensure that this happens.

If they feel honour bound to repay the loan, they are far more likely to do so should their financial circumstances deteriorate.

Diversifying your bitcoin investments

For the most part, economies are not in sync. Even in times of global economic crisis, there can be significant differences between different regions.

Certainly during that last global recession different countries recovered differently; for instance, while many developed countries were still showing negative growth, emerging economies were experiencing significant positive growth rates.

There is a clear correlation between default rates and economic growth. When people lose their job, they are far more likely to default on their loans.

Thus to reduce the risk that your borrowers will all fall on hard times simultaneously, it would seem common sense to lend to borrowers from different countries and different economic regions. It’s simply a matter on not putting all your eggs ion the same basket; an axiom of any investment strategy.

Developing a winning strategy

A big advantage of bitcoin investment platforms is the availability of historic data. However, having access to data is only part of the answer; it’s what you do with that data that’s important.

The art, or the science if you prefer, is to discover correlations between borrowers’ profiles and their levels of debt delinquency.

You can then select borrowers who conform to profiles that correlate with low default rates relative to the interest rates they are charged.

While this isn’t by any means big data analytics, it does at least provide a useful tool that really can help you develop a strategy you are comfortable with.

Tracking the return of your bitcoin investments on Bitbond

If you are just beginning to invest in bitcoins, then you are likely to have just a few loans to monitor; it is quite easy to track the returns using a simple spreadsheet.

However, as the quantity of your investments increases, tracking every single payment can become burdensome, especially when you have several thousand repayments a month.

Fortunately, Bitbond makes tracking the return of your bitcoin investments simple. Your investment portfolio will show a summary of all the data you need.

This includes the number of loans you have according to their status; for instance, those that are in funding, are funded, are current, are late, or are defaulted; along with the outstanding principle for each status.

It also provides information on the total amount of repaid principal that has been received, the total interest earned and the internal rate of return (IRR).

Note that the IRR is used rather than the ROI as the former is annualised, while the latter may be a short term return such as if you receive a ROI of 6% that took just a few weeks to achieve.

Mistakes to avoid with your bitcoin investments

The mistakes to avoid with bitcoin investments are much the same as those in any other kind of investment. These are some typical examples:

Failing to diversify your portfolio

A primary mistake is failing to diversify your loan portfolio. We have already discussed the need to diversify, and there is nothing new about the principal; every investor knows that they should diversify.

However, knowing that you should and actually doing so are different.

Failing to have a plan

If you want to make the best returns from your bitcoin investments, then it is important to invest some time in developing a winning plan. This has been described already, but again it is important to actually do it.

Stepping outside your risk comfort zone

Investing in bitcoins is an exciting opportunity that balances risk with high returns. However, it isn’t the right kind of investment for everybody.

Different people have different attitudes to risk, and if you are particularly risk averse, then perhaps investing in bitcoins isn’t your optimum strategy.

If you are likely to lose sleep worrying that a borrower will default, then it probably isn’t your game.

How to handle a default in your bitcoin investments

As we have already explained, unless you are particularly lucky then some of your bitcoin investments are likely to result in defaults.

However, the default rates are more than compensated for by the high returns you earn on loans that are repaid.

If you have diversified your bitcoin investments, then you shouldn’t be hurt too much by defaults; as they say, it goes with the territory.

However, platforms such as Bitcoin don’t take defaults lightly, and they do their very best to pursue them. But even with the best of efforts, there will be loans that aren’t repaid.

However, remember that borrowing in bitcoins doesn’t let the borrower off the legal hook should they default on the loan.

Bitcoin debts can be pursued through the courts just as if the debts were in any other currency.

Finally | Bitcoin investments

We hope that these notes have helped cut through some of the fog around investing in bitcoins.

It is a lot to take in if you are new to the field, however, there are plenty of resources around to help you explore in greater depth.

As we have said, you can begin slowly and only increase your investment when you are comfortable in doing so. Please check out my The State of the P2P Bitcoin Lending Industry for more information. Thanks for reading.

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