5 mins

How do exchange rate pegged loans work?

Chris Grundy
Apr 4,2016

In mid-December 2014 we launched a new loan type. We call it an exchange rate pegged loan. With this loan, the monthly repayments have the US dollar as the underlying base currency. This way borrowers and lenders can mitigate the exchange rate risk that is inherent to bitcoin loans. All payments, however, are still conducted in bitcoin only. In this blog post, we describe in more detail how the pegged loans work.

The payment schedule of pegged loans

Exchange rate

As stated above we always take the most precise exchange rate. That means we calculate with 2 decimals, even though we do not display them.

Our source for the bitcoin price is BitcoinAverage. They have a cool API that returns the data-set that we use in JSON.

https://api.bitcoinaverage.com/ticker/global/USD/ returns

{ "24h_avg": 285.99, 

"ask": 288.0,

"bid": 287.36, 

"last": 287.42,

"timestamp": "Fri, 09 Jan 2015 17:40:04 -0000", 

"volume_btc": 52815.16, "volume_percent": 88.32 

}

One other thing to note is that we do not take the spot price. Instead we take the average price of the last 24 hours to calculate payments. This way we want to avoid heavy price peaks and drops that can happen at certain points in time.

Final remarks

Exchange rate pegged loans are well suited for traditional loan use cases. If someone wants to finance a machine or working capital withe the loan, the revenues are typically denominated in a fiat currency. In such cases exchange rate fluctuations represent an undesirable uncertainty to the borrower. This uncertainty is mitigated with pegged loans.

It is important to note though, that with this type of loan lenders should instantly convert repayments into fiat. If you keep a major part of repayments in bitcoin, you will be subject to exchange rate fluctuations again. In such a case loans with base currency BTC would be a better fit.

Another way to provide loans with a minimized exchange rate risk is to use a bitcoin purchasing power index.

Get an instant loan for your business

Bitbond is the first global platform for small business loans. Founded in 2013, we have funded over 3,000 loans to entrepreneurs all over the world.
What sets us apart:
  • Instant loans available
  • Get financing anywhere
  • Top up and stretch loans
CHECK YOUR RATES
Never miss a beat, get new articles straight to your inbox
Related Articles
Borrow and invest without borders
CHECK YOUR RATES