Risks of bitcoin loans for borrowers
If you’re one of the lucky few who acquire bitcoin and make use of it for goods or investments that matter, the volatility of bitcoin won’t affect you much. You will not notice as long as you borrow, spend, earn, and repay bitcoin no matter how the value of bitcoin varies in comparison to fiat currencies.
The volatility of the value of bitcoin in relation to fiat currencies poses a significant risk when loans are denominated in bitcoin but converted into fiat currencies and vice versa. If borrowers have to pay back their loan in regular currency, an increase in the price of bitcoin might make their repayments much more expensive. In the same way, a decline in bitcoin prices can help you save money. In every scenario, buying bitcoin in order to repay loans involves extra expenses (besides the spread or commission charged by bitcoin marketplaces). It takes time and effort to sell and purchase bitcoins.
Risks of bitcoin loans for lenders
Lending out bitcoin comes with a slew of potential hazards. These are some of the most important:
1. Lack of regulation
When you lend Swiss francs to Swiss borrowers via Swiss peer-to-peer lending platforms, legal binding private loan agreements are generated that enable you to file debt collection lawsuits against defaulting borrowers. The regulatory framework for digital assets like bitcoin, which is in a constant state of evolution, is uncertain. When a borrower defaults on a loan, this might complicate debt recovery.
2. Dealing with international borrowers
A big portion of the value of Bitcoin loans is that they may be transferred between lenders and borrowers in a variety of countries without incurring significant transfer and currency exchange costs. However, Swiss lenders are taking a risk by providing loans to people who live outside of Switzerland.
Because the ZEK and municipal debt collector offices in Switzerland only track the credit behavior of citizens, it may be tough to pinpoint lenders’ creditworthiness. In many countries, there are no comparable credit agencies. Pure trust is given by some bitcoin lending firms, while others rely on reputation models that evaluate borrowers based on how they repay funds borrowed through the same platform.
The anonymity of the internet and bitcoin in particular provides a lot of opportunity for misconduct. It might be tough or impossible for platforms or lenders to enforce debt collection methods on nonresidential borrowers. To collect outstanding debts internationally, reputable bitcoin lending firms usually collaborate with debt recovery companies. Investors should always weigh potential risks when dividing their money among a large number of loans. You can utilize a Bitcoin loan to invest in a large number of loans at once, lowering the danger.
Certain platforms, for example, Swiss cryptocurrency service Nexo, use a secured loan approach in which fiat cash or cryptocurrency is pledged as collateral. This Lombard loan structure offers lenders some protection since they may keep the collateral if the borrower fails to repay their debt. The collateral, on the other hand, may not always be enough to safeguard the loan if bitcoin’s price rises over the course of the tenure. The loan platform is normally expected to balance the account by selling a portion of the collateral. However, in case of a significant drop in underlying cryptocurrency prices, this might be challenging for investors seeking greater legal protection. Peer-to-peer lending sites should all be considered, as well as cryptocurrency loan platforms.
3. Bitcoin price volatility
Investors bear the risk of bitcoin price fluctuations when loans are denominated in fiat currency. If a borrower has to repay 1000 dollars’ worth of bitcoin at the end of the loan term, but the value of bitcoin borrowed by the lender rises by 200 percent, then only 1000 dollars’ worth of bitcoin will be repaid and half of the lender’s investment will be lost. If you want to short bitcoin but don’t expect the price to fall, consider investing in bitcoin-denominated loans. This ensures that you get back the same amount of bitcoin as well as interest.
4. Risk of digital theft.
Some bitcoin loan platforms may require you to keep bitcoin in a wallet provided by them at least temporarily. Bitcoin loan platforms, like all online bitcoin wallets, are vulnerable to hacking assaults.
5. Risk of platform failure.
Due to the global nature of bitcoin loans and the lack of legislation, bitcoin lenders are heavily reliant on platforms to conduct bitcoin loans and receive repayments. However, at this time, bitcoin loan platforms are still young and financially feeble. They’re also susceptible to changes in bitcoin price movements. If a platform goes bankrupt, lenders may find it difficult or impossible to recover liabilities if the platform is no longer available. Borrowers might have trouble repaying their debt, particularly if it is funded by a number of investors – which may harm their credit if investors initiate debt collection processes.
Costs of bitcoin loans
Lending on bitcoin may incur costs for borrowers and lenders, depending on the lending platform. Some platforms charge a one-time brokerage fee at the start of the loan term, which is usually deducted from the loan before it is paid out to the borrower. Bitbond charges a one-time fee of between 1% and 2.5% of each loan (payable over the course of the loan) in addition to its 1% recurring charge. Nexo does not charge any additional fees other than interest on the utilized part of your line of credit.
Incidental expenses include late payment reminder costs, late payment penalty interest, bitcoin transfer costs (charged by bitcoin miners to move bitcoins between wallets), and bid/ask spreads or brokerage charges when cryptocurrency is purchased or sold for loan repayment. Nebeus, a UK-based bitcoin loan provider, takes 3.9% of each transaction to buy bitcoin on your behalf but does not charge a fee to sell it.
