The Best Collateral in the world used for Bitcoin Loans
Cryptocurrency will Become World’s Best Collateral and Best Money to Lend Out
“Having invested in and used altcoins as collateral at Btcpop, there is no doubt in my mind this where global finance and tokenized ownership are going in the future”
All lending involves Collateral
Collateral is defined as something pledged as security for repayment of a loan, to be forfeited in the event of a default. Collateral is involved in every lending situation, just in different forms
2 Types of collateral
There are 2 main types of collateral There is tangible collateral like real estate you pledge to the bank for your mortgage, and then their is intangible collateral which could be described as reputation (or credit score) which you give to the bank for a loan or line of credit.
Tangible collateral is like a mortgage. The borrower pledges the tangible asset (real estate) in order to receive the loan. If he/she defaults the bank is able to sell the real estate to recoup some of its losses. Other tangible collateral could be an antique pawned at a pawn shop or basically any asset has a market value and can be sold in the case of default.
Intangible collateral refers mainly to the reputation of the borrower. A common term for this is a credit score. A credit score is intangible but still collateral. A bank cannot touch or sell a credit score. But, most banks will accept a high credit score as collateral for a loan.
Reputation is not commonly looked at as collateral, but it shares some of the same qualities. When you use reputation to borrow, you pledge that reputation as security for the loan. If you default, that reputation is forfeited.But the difference is that in the case of default the borrower receives a negative benefit, as opposed to the bank receiving a positive benefit as with tangible collateral.
Why Cryptocurrency is the Best Tangible Collateral in the World
Ironically, Cryptocurrency (which is intangible) is the best tangible collateral in the world today! It really makes sense, the best money the world has ever seen, is also the best collateral the world has ever seen.
Some of the characteristics that make collateral ideal are:
- 100% Ownership: Inherent to cryptocurrency, ownership is complete and final. If you own the private key you own the currency. So when a platform like Btcpop holds altcoins as collateral for a Bitcoin loan, Btcpop has full control and there is no expense disputing the ownership or rights of the asset.
- Global Liquidity: Another quality inherent to cryptocurrency is its ability to be traded almost anywhere in the world very quickly. Hundreds if not thousands of online cryptocurrency exchanges provide users the ability to trade the token they don’t want into one they do at a very low cost. Fiat is even becoming easier as more exchanges enter the space providing more gateways. Btcpop hosts its own internal exchange where collateral will be liquidated at competitive global prices thanks to arbitrageurs and soon arbitrage bots thanks to exchange API
- Cheap Quick liquidation: The most common form of collateral in the world real estate, is actually really expensive to liquidate. Laws, Realtors, Lawyers and labor all take a big chunk out of the real estate asset to get it sold. And even that doesn’t include the time cost to liquidate which ranges from 6 months to 2 years! At Btcpop per the agreement Altcoins are liquidated after 30 days delinquency near instantly depending on exchange conditions. And the expense to do this directly on Btcpop’s exchange is only .25% for the exchange fee!
- Divisibility and Diversification: Another feature of cryptocurrency is that it’s easy divisible and can be made into very tiny chunks. This means that holders of collateral can practically invest very small amounts in many loans, and still retain the ability to be paid back. If you lent $.01 to everyone in the world and expected to get 10% interest you would get 0% interest as $.01 is basically the smallest unit of measure in fiat. As well there is no efficient means for paying someone $.0001. but with cryptocurrency it is possible and could eventually allow truly global diversification.
Altcoin Collateral Still has some Growing to do
I think it’s important to note that Btcpop didn’t create this concept of altcoins as collateral. It was actually exchanges and margin trading that originally used cryptocurrency as collateral. When you margin lend you offer your portfolio of altcoins and or Bitcoin up as collateral so you can trade with leverage. Then if the value of your portfolio goes too low, it will get margin called and your funds will get liquidated on the market until what you borrowed is paid back.
Margin trading on an exchange and portfolio liquidation have historically worked pretty well. But the biggest problem is liquidity. In the past a million dollar sell order could tank the Bitcoin price upwards of 10% on that exchange and even affect the global price. This of course is getting better as the market cap of all cryptocurrencies grows and more exchanges with more arbitrage bots pop up to solidify a more global more liquid price for altcoins.
Making Reputation Good Collateral
Current Reputation Exists in Many Forms and is Subjective
Current intangible collateral (reputation) exists in many forms. The most well known is your credit score. This is an attempt at an objective measurement of the completely subjective amount you value your reputation. It does pretty good overall, but we all know its limited in its ability to clearly predict a borrower’s creditworthiness. An extreme example would be a person finding out they now have a terminal illness… as bad as it sounds, no matter how high their credit score is, they are likely not a good credit risk as they no longer value their credit score at all.
This subjectivity is the difficult problem to be solved regarding reputation and using it for loans. For example, a very family oriented person would value his/her family reputation much higher than their bank reputation. So they would default on their bank loan before they defaulted on money borrowed from uncle Bob. And a computer nerd may value his/her online reputation more than their bank reputation, and would default on bank loan before they default on an online virtual world payment.
Early Online Reputation was not that valuable
P2P Lending in Bitcoin is still a young rapidly growing and exciting space. But, its still recovering from its birth by fire with Btcjam and BitcoinLendingClub. The problem that quickly came apparent in cryptocurrency was defaults. A great idea, was ruined by the fact that people didn’t value their intangible reputational collateral enough to pay back. This combined with the Bitcoin price increasing quickly read to 50%+ default rates for poor borrowers.
This I would argue is an identity issue more than a concept issue. Everyone values their online identity on Facebook, Twitter, and other social media platforms ect. They also value having a pretty good name on the internet and not being blacklisted. But, if keeping that meant they had to pay 50% interest on some money they borrowed in Bitcoin and converted to fiat before the price went up. They quickly weigh their choices and decide their online identity and reputation is not worth the cost of paying back the Bitcoin.
Online Cryptography Based Identification will eventually solve the online identity issue
Projects like Civic are a great step forward to users finally having 1 secure global online identity. I even foresee governments issuing blockchain based digital identification in the not so distant future. This will greatly improve reputation only based lending, as the more sources that accept the same singular identity and reputation, the more valuable that particular identity becomes to a person. And the less likely they are to ruin that reputation by defaulting on any debts connected to it.
Blockchain Based reputation Future
Agree with me or disagree with me. But, I know that banking will move online and it will become peer to peer. If that is true, wouldn’t it make sense to get online and start building your blockchain based reputation today?
Btcpop has currently done the best job possible with existing tools and identification to facilitate reputation based lending. Online profiles are connected securely to physical world identities and steps are continually being made to improve collections and prevent scammers. The community as also grown into a skeptical watch dog searching into new borrowers and protecting investors from scammers.
Some successful P2P borrowers have even grown their online reputation enough to regularly borrow near 6 digit fiat amounts without any tangible collateral. However, that sort of reputation is built over multiple years and the industry is not that old yet. But, you can start working towards that type of reputation today and start by leveraging your altcoins (or P2P Shares) as Collateral at Btcpop!
Build Your Blockchain based Reputation Today at Btcpop!
In Summary, even though cryptocurrencies application as collateral now is still fairly limited, I know that cryptocurrency will continue to compete and eventually become the world’s best collateral. Taking it one step further, I think that altcoins will eventually become the world’s biggest form of collateral in the form of property ownership. When real estate makes its way to the blockchain, your property/mortgage can be broken up into tokens and held by the world as collateral for your peer-to-peer loan, all tied to your single online identity and reputation. But, even if it takes a couple years for the world and global finance to be tokenized you can effectively participate in that futuristic world today with Altcoins as collateral at Btcpop.co