Thursday, August 14, 2014

BitBond, I'm surprised and mostly alarmed by the general interest

I came across this article that talks about Bitbond, a service that allows people who owns bitcoin to lend them to borrowers. It's a peer-to-peer lending using a similar rating as does

Looking at the offering list made by borrowers, I am a bit alarmed. Borrowing bitcoins is the equivalent of shorting it. The borrowers would make money if the value crash down, but they will be crushed if the value goes up. But as opposed to a futures account where you might have a buy stop to exit from the trade if you go wrong, this is a loan. Imagine Bob taking a loan for 10 BTC back in August of last year, worth at the time about ~$100/BTC for a total of $1000. Then Bob would see the price goes up by a factor of 10 about 6 months later, and now he owes $10,000.

I would not be surprised to see many of those borrowers simply default on any future drastic upward move in the price of BTC. I do not believe many of the lenders are realizing this risk, and just the same for borrowers.  Look yourself at the offering for loans you could invest in:

I see terms varying from 6 weeks to 6 months. I would be mostly nervous with the 6 months term, the 6 weeks is likely fine as long as you do not perceive a break out. If, as a lender, you were expecting a flat or downtrend in the price, but wanted to keep your BTC, you could still consider lending them, at least you would earn interest and the price drop means it will be even easier for the borrower to repay  you.
But I would stay within a 6 weeks window and make sure you understand core technical analysis on the BTC chart, if you can read a price upward move coming, even a 6 week loan should be avoided.

May the coin be with you