I wrote a quick introduction on peer-to-peer lending on BTCJam recently as it is a great way to invest bitcoin and get excellent returns. You can read that post here. If you are familiar with the idea of investing in peer-to-peer loans, but are still unsure about it, then read on as we take a look at how to assess and choose a loan to invest in.
It can be quite confusing at first but it really comes down to those two factors – Risk and Return.
The return of an investment is very precise and clinical – it is what it is. Quite simply, a return of 100% is ten times more than a return of 10%, but if you make the decision purely on return then you could be in for a nasty surprise. You also need to look at the time frame that the return is for and whether it suits your investment strategy. Loans on BTCJam range from 1 month to 12 months.
The returns for loans on BTCJam are specified by the yield, which is the actual return of the investment over the loan period, as well as the annual return. If the loan term is less than 1 year, then the return will be higher than the yield; i.e.- if a loan yields 10% over 6 months, then the actual 1 year return will be specified as 20% which can be confusing as the loan can’t actually run for a full year and can’t generate that return. If you just remember the yield and time frame when first starting, you will be fine.
To help with our decision we have to look at the risk of the investment. This is much more of a grey area and requires some thought and planning. To assess the risk, all borrowers on BTCJam are given a rating from A+ to D-, where A+ is the highest (lowest risk) and D- is the lowest (highest risk). The interest rate, and therefore the return for investors is determined by this and it is a quick way to assess the investments.
It helps if you understand the borrower rating process, but it is intentionally complicated to ensure that borrowers are rated correctly. Suffice to say that the ranking for borrowers really comes down to two things – borrowers profile and how complete it is as well as the specifics of the profile (identity verification, income, etc.), and the reputation they have. As their reputation grows, their interest rate reduces, and therefore our return reduces as it means that they are lower risk.
One thing to note is that it does pay (literally) to look at the lower rated borrowers as they can be new to BTCJam and are building their reputation. Typically, they will pay their loan out quickly and apply again once their rate is reduced.
Another way to assess the risk is simply read the borrowers loan application which will include the purpose of the loan. Keep in mind that many users don’t have English as a first language so this can be a bit of a judgement call and requires some experience. If the content is adequate and it sounds plausible to you, then it should be fine. If it sounds suspect, then forget it. You can also do a quick Google search to see if anything similar comes up as it might be copied from another lending site.
Once you understand the risk and return of an investment, you simply ask yourself the following question:
Am I prepared to take that risk to get that return in that time period?
If yes, then go on and invest. If you answer no, then move on.
So, that’s really it. If you are looking for higher rewards and can stomach a bit of risk, then investing in loans on BTCJam is for you. One great feature of BTCJam is that you have complete control over how you invest and can adjust your investment to suit your risk/return profile.
Next, I will be giving some specific loan examples and case studies.