A guest post by Stu Lustman.
Stu Lustman is a Commercial Credit Professional turned blogger and consultant in the Peer to Peer Lending space with a special sub-specialty in Bitcoin based lending. He applies established commercial credit techniques into these new markets. You can follow his blog at P2PLendingExpert.com and you can follow him on Twitter at @StuFinancesTech
In the 4th quarter of 2010 Lending Club originated $37 million of loans and in the 4th quarter of this year, they are projected to do over $2 billion in new loans originated. That’s only 5 years for a 53,000% increase.
Lending Club had a quiet period while registering with the SEC that lasted from April 2008 until October 2008. At that time they could only fund borrower loans with their own money and not with lenders funds. Not only was it quiet in terms of using investor funds but they could not talk publicly about their companies while the registration was going on. The notes were then considered securities and they were allowed to move ahead and develop investor/lender markets. In other words, during part of 2008 they basically did no business at all and still got this exponential growth over time.
Now you are probably saying at this point ‘hey I lend in Bitcoin, who cares about this?’ A good question.
Bitcoin lending in the next 5 years CAN also experience this kind of hyperbolic growth. It also could flounder. Let’s look at the argument for each. Before I get started, let me say that there will never be $2 billion in BTC loans originated. I’m just talking about a high speed, high growth opportunity relative to its current size.
Where We Are Today
The top 3 Bitcoin Lending platforms, Loanbase, Bitbond, and BTCJam, do around $1.5 million in loan volume per month. This is far less than Lending Club originated a couple years in, yet far more than the nearly zero volume done during their quiet period. The BTC lending platforms can get bigger and better if they make some improvements.
On my blog, I track my returns every month and while most months my BTC returns are higher (over 1% per month) than my USD returns, my default rates are much much higher even with very strict selection of borrowers. Let’s get to how the platforms can grow in a smart way.
The Growth Argument
BTC is likely to see greater acceptance in the next 5 years although my view it will always be a niche market and never a true global currency like some wish and hope. More importantly, blockchain as a technology is seeing huge levels of increased interest including nearly every major multinational bank on the planet is looking at it
One example is the Fixed income markets. As of Q1 2015 the global bond market (fixed income) is $20.8 trillion, a huge market. Nearly every transaction in the fixed income markets is still done on paper. It’s not even digitized like stock market trades are. That’s an area ready for blockchain disruption and not surprisingly its being looked at very heavily.
Fixed income markets are business as it was done, like a pre-recession bank. Pre-recession, banks used to do debt consolidation and other loans for great credits and longtime customers. Now they don’t so Lending Club does. As blockchain gets more mass acceptance for its use in financial transactions, then so will Bitcoin as its token of value, and as an investment tool to lend and borrow (my favorite use of it).
Blockchain and Bitcoin are linked, at least for now. Block chain benefits are Bitcoin benefits and as blockchain seems inevitable to grow, Bitcoin’s use and importance will grow as well. An article just out today outlines this relationship as Blockchain investment is expected to trigger a Bitcoin boom.
Banks aren’t doing small business loans either so Bitcoin lenders are stepping in. Bitbond in particular has a nice niche with eBay and Amazon traders while Loanbase has a nice focus area with LocalBitcoins traders and Bitcoin miners. BTCJam is a little bit of a catch all doing some of all Bitcoin categories.
Lending Club started on a rocky road (see quiet period) and worked its way out of it and grew to be a monster setting the standard for p2p lending. The big 3 lending platforms of BB, LB and BJ can do this too. Default rates are high and that’s the rocky road they have to work on to be successful in the long term. This is something I talk about frequently on my blog although I have been able to still have a positive return on Invested Capital.
It also needs to be noted that if Bitcoin does become a global currency and/or has a big increase in value from its current price then those Bitcoins lent out will equal a greater number of dollars lent.
Some of the things the platforms can implement if they want to get to Lending Club levels of trust are outlined in my BTC Lenders bill of rights post here where I get into topics like better ID verification and due diligence on the front end and a collections apparatus on the back side of the deal. Identity in particular is an area rife with Blockchain based opportunity.
By the way, Lending Club is highly trusted because all of their statistics are available and 8 out of 10 that apply for a loan on their platform are declined. What they don’t do is just throw up every loan to see if it will fund, and every loan would get funded. Greater transparency from the big 3 BTC platforms will help in this area. The exception is Bitbond, who allows anyone to download all of their loan data and slice and dice it however you’d like. They should all do this.
These are all doable things that if implemented and done well will increase trust in the lending platforms and grow their loan originations exponentially. It’s hard but it can be done.
The Argument Against Successful Growth
The Systemic Argument
Bitcoin by its nature is decentralized and distributed. Those that attempt to centralize and harness it seem to get slapped down. There’s a part of the community that doesn’t want it even when centralizing certain operations is beneficial. This is something that could continue for years, including the 5 years down the road we are looking at. Decentralization is a tough trend to overcome for operating companies to be profitable in Bitcoin.
There’s a reason why the companies with the most investment and greatest profits today are Exchanges. Exchanges provide the on ramps and off ramps between Bitcoin and fiat. The implication is this, if you follow the money invested, is that the links to fiat money will continue for years to come.
Exchanges also provide the greatest opportunity to trade Bitcoin like a financial tool, like trading Corn, Soybeans or Euros. Again, on ramps and off ramps.
The Default Argument
Part of the systemic argument acknowledges that there is a portion of the community that is anarchic in nature. Some of this same community will never comply with regulation/compliance like KYC/AML. This same community, and many Bitcoiners will resist all along the way including governmental/legal involvement even when it is to our benefit like having a Legal and Collections apparatus.
Today, it is just too easy, and with too few consequences, to walk away from a Bitcoin loan taken out. In some ways, it’s a wonder that default rates aren’t even higher, yet people pay their bills and like to preserve their good names so the result is an environment with high interest rates and high defaults, for now.
Current default rates across the big 3 platforms are between 20-25% and this is something that is not sustainable if they want keep existing lenders and attract new ones to their platform, both of which are necessary for 5 year growth.
If the platforms don’t work out this singular problem, then some of them will fail for sure. It’s possible, although I find it unlikely, that all of them could fail.
What I Think Will Happen in 5 years
One thing I don’t think will happen in 5 years is Bitcoin becoming a reserve currency. That doesn’t mean that I don’t think Bitcoin will grow in importance and popularity. I think it’s a near certainty that it will grow in importance.
Bitcoin lending platforms have the opportunity now to start putting in the improvements necessary to scale up their operations and become profitable. I think this will happen, but very slowly. In fact, I think there is a good chance the platforms don’t stay far enough out in front of potential regulation by trying to self regulate and will have regulations thrust upon them. Some of them, like for Identity and KYC, will be helpful and others could hurt their growth.
Also, there will be one big platform failure in the next 5 years. It happened to Nordic Nasdaq listed Trustbuddy and it will happen here.
If it sounds like I’m hedging my bets on what will happen in 5 years, it’s because I am. Not only do I not know what will happen, I am not sure if the situation will be close to the same, much better or much worse. I would like to think it will be much better and the platforms have it in their power to do it if they want to and can get some of the more independent sides of the Bitcoin community to cooperate.