Since our inception, BTCJam has grown to over 50,000 users and has conducted more than $8 million USD in bitcoin transactions. Although our user base has shown a strong and steady growth and people are becoming more familiar with our product, we are still regularly asked, “What is peer-to-peer lending?” At BTCJam, we feel that it is important for us to explain to active and potential users what peer-to-peer lending is and how it defines our bitcoin lending platform.
According to Wikipedia, “peer-to-peer lending, commonly abbreviated as P2PL, is the practice of lending money to unrelated individuals, or ‘peers,’ without going through a traditional financial intermediary such as a bank or other traditional financial institutions.”
Early and archaic versions of peer-to-peer lending are payday loans and loan sharking. This is when an individual goes through a company that typically charges enormous interest rates (upwards of 100-200% per month). These stores regularly set up shop close to banks, jails, and other establishments where large sums of money are essential. Payday loan shops take advantage of impulse borrowers who do not understand the financial ramifications of agreeing to poorly structured loans with high interest rates.
As the Internet has expanded and new forms of financial transactions have been established, a more safe and secure method of peer-to-peer lending has developed. Two of the largest and oldest peer-to-peer lending platforms to date are Lending Club and Prosper. All of the transactions take place online and lenders chose which borrowers to specifically invest in. Typically, the lender and borrower come to a mutual agreement on the interest rate of the loan before it is granted. The peer-to-peer lending company serves as a marketplace: connecting lenders and borrowers together without the involvement of banks or other institutions.
There are several ways in which BTCJam differs from Lending Club and Prosper. The first and most obvious difference is bitcoin. In case you didn’t know, the acronym for the bitcoin currency is BTC—this is where our name BTCJam comes from! Bitcoin is preferable compared to regular fiat currencies because it is decentralized, transparent, fast, and inexpensive. Due to the nature of bitcoin, it is easy to implement transactions on a global scale. This is why lenders at BTCJam can lend to borrowers all over the world. Comparatively, lenders at Lending Club and Prosper can only grant loans to people within their own country, and thus, cannot protect their assets from a regional crisis or currency devaluation.
Another way in which BTCJam differs is the financial benefits that lenders and borrowers can take advantage of. BTCJam has no added fees for investors; as a result, we are able to produce higher returns on average (upwards of 19% APR). Just to give you a sense, the average return on traditional peer-to-peer lending platforms is around 8% APR. BTCJam is also able to protect users against bitcoin volatility—for example, if bitcoin is devalued, borrowers are protected through indexing their loan amount in US dollars. Additionally, due to the nature of bitcoin, you can split one (1) bitcoin into a hundred millionth (0.00000001) of a bitcoin. Lenders on BTCJam are able to loan in fractions of a bitcoin which empowers diversification like never before.
The last significant way in which BTCJam differs from traditional peer-to-peer lending platforms is that, as of now, we do not have institutional investors on our website. Lending Club and Prosper are host to a number of institutional investors. These investors function as small companies rather than individuals. Often, these investors get priority access to the best “A ranked” loans while individual investors are left with the lower quality loans. At BTCJam, we do not give specific investors preferential treatment—everyone is treated equally. Although we are considering implementing a form of automatic investments in the future, it will not be near the same degree as Lending Club and Prosper.
We hope that this explanation of peer-to-peer lending gives a cohesive picture of how it is relevant to our platform. As the future of international micro-financing evolves, so will BTCJam. We are constantly staying active and up to date on the innovation and diversification of the bitcoin ecosystem. At BTCJam, we strongly believe that peer-to-peer lending through bitcoin will enable people across the world to access fair and affordable loans. Please stay tuned, as we will be starting a new segment on Borrower Stories.