Bitcoin Loans: A Step-by-Step Guide

The acceptance of Bitcoin as a medium of exchange for goods and services has come a long way since the first block was mined in 2009. Almost a decade later, BTC managed to attain its all-time-high value of $20,000 in December 2017 further bringing its existence to the spotlight of investors and innovators in the finance industry. As a result, financial services such as loans that were once only available through traditional banks are now available via Bitcoin. 

What are Bitcoin loans?

A Bitcoin loan works like a traditional loan in the sense that the borrower has to apply for the service and put down some form of collateral in return for the requested amount. Additionally, there is an interest charged on the amount as well as fees to finalize the transaction. All this is usually well laid out in the terms and conditions of the respective lender. However, this is where the similarities end with the traditional banking loans.

Due to the decentralized nature of blockchain technology and cryptocurrencies, financial services such as mechanisms of a crypto loan are carried out in a peer-to-peer manner. This implies that the lender of the required funds can be an ordinary individual with funds ready to finance the loan application of the borrower. A trusted online platform acts as a facilitator of the transaction thus providing a secure environment.

Here are 5 reasons why you should borrow a Bitcoin loan

To begin with, a Bitcoin loan can be used to finance traditional obligations such as paying off credit card debt, financing an unplanned emergency or even paying your rent. The Bitcoin loan can also be used to finance non-emergencies such as buying items on the internet during a sale or even taking a spontaneous vacation after spotting a once in a lifetime discount. In this regard, the loan can either be denominated in fiat or the BTC exchanged for traditional currencies such as the USD and Euro.

Secondly, Bitcoin loans can be used directly to purchase products and services which require payment solely in Bitcoin. Nowadays, it is very common for merchants and service providers to have integrated digital asset transactions into their portfolio of accepted methods of payment. 
Their goal is to keep up with the ever-evolving payment trends of using digital currencies.

Thirdly, a Bitcoin loan can be used to bet on the future price of BTC which has a habit of gaining by a considerable amount over a short period of time. For example, at the time of writing this, the Bitcoin halving is a month away. Due to this event, the price of BTC is thus predicted to gain considerably in the coming days. This is particularly beneficial for borrowers of Bitcoin loans denominated in common fiat currencies. If the value of Bitcoin goes up, they can sell the borrowed BTC, repay the initial loan amount denominated in fiat (with interest) and then pocket the difference. 

Fourthly, a Bitcoin loan can be used to invest in an Initial Coin Offering or an Initial Exchange Offering. Although the popularity of such crowdfunding efforts has reduced due to a high rate of scams in 2017 – 2018, utilizing a Bitcoin loan to invest in a good research project, has the potential of providing a Return on Investment several times higher given the tokens received is sold at the right time in the crypto markets. 

The fifth reason why you should utilize Bitcoin loans is the possibility of using such funds to trade in the numerous cryptocurrencies exchanges available. A trader who is conversant with both technical and fundamental analysis of digital assets can use the borrowed funds to trade any or all, of the top 5 cryptocurrencies expected to gain in 2021.  

Who gives loans in Bitcoins?

Bitcoin and cryptocurrency forums are one place where one can get a Bitcoin loan. On these platforms, lending is carried out based on your reputation as a participant of the online community. This, in turn, means that you would have to be a known member of the respective online community and have a reputation for being trustworthy with borrowed funds. However, due to the trust aspect of going in blindly into such websites, this method of acquiring a Bitcoin loan is best left to experienced Bitcoin and crypto enthusiasts. Such individuals can spot a con using known time tested methods that can help in identifying a Bitcoin Scam. 

Security is the single most important concern of any online transaction. Both the lender and borrower need to confirm that the other party is not a scammer. In this regard, it is advised to visit trusted Bitcoin lending platforms that require both parties to go through mandatory KYC procedures.  

How do I borrow a loan in Bitcoin?

To start, anyone interested in borrowing a loan in Bitcoin must carry out their due diligence when looking for a trustworthy platform that offers financial services. Whether centralized or on a peer-to-peer level, research must be carried out to determine the trustworthiness of such platforms. One can use online reviews that are easily available via a simple google search as one way of determining the legitimacy of a Bitcoin loan provider. Recommendations from other crypto enthusiasts is another way of gauging the trustworthiness of a Bitcoin loan website.

Once a platform is selected, the borrower will then have to go through the common KYC (Know Your Customer) procedures of verifying identity, both their email and physical address, source of income and other personal information that might be requested by the lending platform. These measures are meant to protect both the borrower and the lender. By verifying identity, the lender can gauge whether the borrower is who they claim they are. This is one measure of preventing fraud. Additionally, verification guarantees that the borrower can indeed pay the loan amount thus reducing the chances of defaulting. 

Funding

As a borrower, once your account passes all the verification steps, you are now ready to select your loan type and amount through the submission of an online application. Once the form is filled and submitted, a response on whether your application was successful will be provided in a few hours. 

Depending on the procedures of the platform, the borrower would have already deposited a set amount in cryptocurrency as collateral for the loan. In this case, once the application is approved, the requested funds are then deposited to your account. 

If collateral has not been deposited, the borrower is then requested to do so after a cryptocurrency wallet address is provided by the platform. Once this transaction is complete and confirmed on the blockchain, the approved funds will be disbursed to your account. Meanwhile, the collateral is held safely till the loan is paid in full with all applicable fees and interest.

Peer-to-peer platforms

The majority of online lending platforms observe the peer-to-peer model highlighted above. This means that you are not borrowing from a financial institution, but rather, from an individual or a group of individuals who are willing to loan out their digital assets to qualified applicants. The platform only acts as a facilitator of the transaction based on set terms and conditions. In case of a dispute, the online platform acts as an arbitrator.

The concept of P2P (Peer-to-peer) lending has started to catch on as Bitcoin and other cryptocurrencies continue to become popular across the globe. This method provides one of the easiest methods a borrower can apply for and get approval for a Bitcoin loan. As with all lending, the borrower must achieve a level of credibility on the platform to increase their loan limit which provides access to more funds.

Trust Score

Further elaborating on how to achieve credibility on such platforms, the borrower must attain what is known as a Trust score. A trust score is similar to a credit score in the sense that the borrower has to verify their identity and financial history. The more documents you submit to verify your ID and financial credibility, the higher your trust score. 

What documents will I need?

Just like in a traditional bank loan application, the applicant of a Bitcoin loan must provide additional documentation to jump-start the process. In traditional banking settings, the documents needed are usually a form of identification and proof of income. However, due to the borderless nature of Bitcoin loans, more documents might be requested.

For a Bitcoin loan, the applicant might be requested the following documentation.

• Government-issued ID: Due to the borderless nature of such peer-to-peer platforms, the majority prefer a scan of a valid passport rather than a regular driver’s license. 
• A selfie with the government ID and phrase: Additionally, many platforms now request a selfie of the applicant holding the passport. This procedure has proven to be very efficient in verifying that the ID belongs to the owner. Some platforms request the selfie to include a piece of paper with the date and some unique phrase or personal signature. 
• Email verification: The platform will send either a clickable link or a code to your email address. 
• Address verification: Utility bills, bank statements or tax returns are usually requested to verify your address. 
• Social media profiles: Linking the application to popular social media platforms such as facebook, has become an efficient way of verifying the applicant’s ID. To note, is that the email used to register on the lending platform should correspond to the one used on the social media profile.
• Income verification: Pay stubs, invoices, contract of employment or the aforementioned tax returns might be requested to verify the applicant’s income. 
• Connection to other online payment accounts: The ease at which one can link payment accounts such as Paypal, eBay or Amazon can also provide a fast route to verification of your account. 
• Credit Card statements: To further boost their financial trustworthiness, applicants can attach additional documents such as credit card statements to highlight their punctuality in paying debts. 

Am I eligible to borrow a Bitcoin loan?

As with all cryptocurrency-related financial services and products, one must reside in a country that recognizes and regulates Bitcoin transactions for them to be eligible for a Bitcoin loan. This includes countries and territories such as the United States, Germany, and the Marshall Islands. 

Different types of loan models

Borrowers usually have two options when selecting the type of loan model they would prefer. They can choose between loans denominated in Bitcoin or loans denominated in major fiat currencies such as the Euro, GBP and USD. 

The selection of the loan model is left to the discretion of the borrower. It is usually dependent on the use of the loan once it is approved and the urgency of the funds. 

Loans denominated by Bitcoin

If the borrower opts to take out the loan denominated in Bitcoin, all financial calculations by the lender will be carried out in BTC. This means that the borrower will have to pay back the loan, fees and all accrued interest denominated in Bitcoin. 

For example, if a borrower requests 1 BTC for one year at an annual simple interest of 5%, at the end of the loan period, he will pay a total of 1.05 BTC to the lender and any fees that might be part of the transaction. 

This type of model is particularly preferred by the Bitcoin miner or the crypto trader who prefers to trade BTC pairs on popular cryptocurrency exchanges or online brokers. These two activities do not necessarily need the traditional conversion to fiat since all calculations are done with Bitcoin in mind. In the case of the miner, doing his finances using BTC is particularly efficient when you factor in that his main focus is the amount of miners’ reward generated per day.

On the other hand, a pure BTC trader has one objective and one object alone: to attain more Bitcoin through trading.  

Loans denominated by traditional currency

Additionally, the Bitcoin loan can be denominated in traditional fiat currency. In this case, the borrower must repay the Bitcoin equivalent of the agreed fiat amount lent to them. For example, an approved loan of $1,000 worth of Bitcoin at the initial time of lending will require the borrower to pay $1,000 worth of Bitcoin plus applicable fees and interest at the agreed repayment date. 

This means that with the interest rate of 5% over the same one year period used in the last example, the borrower will have to repay $1,050 after one year. This amount in fiat will be paid using the rate of BTC on that date. This model is particularly beneficial for anyone who receives an income in fiat through their regular day job or business. 

An additional advantage of this type of loan is the fact that it can be taken by the borrower in anticipation of the price of Bitcoin going up with time. In this case, the borrowed $1,000 in BTC is held for the predicted time period when its value is expected to go up considerably.

Many popular crypto exchanges and brokers provide such lending services denominated in fiat for the financing of margin trading. Examples of crypto exchanges that provide this service include Binance and Bitfinex.

What can I use my Bitcoin loan for?

To better understand the benefits of Bitcoin loans, one must put themselves in the shoes of both the lender and the borrower. In the case of the former, a lender can be an investor who would like to play the long game as well as utilize his idle Bitcoin holdings to generate additional revenue. In this case, lending out Bitcoin allows the lender to still own BTC in anticipation of its value going up, as well as earning interest from the loan provided to the borrower. 

In the eyes of a borrower, a Bitcoin loan can be used for the five earlier mentioned reasons why one should consider the option. They include: 

• To pay for emergencies or financial obligations
• To purchase goods and services where only BTC is accepted
• To speculate on the future price of BTC
• To participate in an ICO or IEO
• To use the funds to purchase other cryptocurrencies that exhibit signs of providing profits

Are there any drawbacks?

As with all types of lending, Bitcoin loans have their drawbacks for both the borrowers and the lenders.  

Drawbacks for borrowers

As a borrower, the daily volatility of BTC might present a challenge when the loan is denominated in Bitcoin and a conversion to fiat is needed. This, in turn, means that the borrower is left vulnerable to price fluctuations that might impact the exchange rate of the conversion. In addition to the potential of losing on Bitcoin value when converting to fiat, there are transaction fees to consider if it is done on a crypto exchange. 

If the value of Bitcoin continues to rise and the funds are now in fiat, the borrower will have to add fiat out of pocket to come up with the equivalent of the original Bitcoin denominated loan. For example, the borrower takes out a 1 BTC loan with the value of Bitcoin at $6,000 and immediately converts to fiat. On the day of the repayment, Bitcoin has risen to $8,000 and the borrower is now left with the burden of finding another $2,000 from his own pocket to pay back the 1 BTC with a higher value. 

Drawbacks for lenders

From the point of view of the lender, Bitcoin loans pose significant risks due to the lack of regulation. If the borrower reneges on his debt, there are no clear cut guidelines on how the situation is to be handled. To top it off, the borrower might be a resident of different jurisdiction thus posing another challenge of abiding by the laws of another country and/or attempting to enforce debt collection in a foreign land.

In such scenarios of different jurisdictions, determining the trustworthiness of a borrower might also pose additional challenges given that there is no standardized model of determining a borrower’s creditworthiness. 

One way of overcoming such challenges is for the lender to use a platform that requires the borrower to deposit some collateral in the form of a certain amount in a major cryptocurrency proportional to the loan requested. 

Best Bitcoin loan websites

This then brings us to the topic of finding and selecting the perfect Bitcoin loan platform that suits the need of a borrower and potential lender. The three best loan websites are Lendabit, Biterest, and Bitbond. 

Lendabit

Lendabit is a peer-to-peer lending and borrowing platform that requires users to deposit collateral in Bitcoin. The platform offers almost instant credit lines with 0% interest for the first 45 days. To get started, one has to sign up by filling a registration form, confirming their email address and completing the mandatory KYC verification process. Once approved, the borrower’s credit line is automatically adjusted to reflect the amount of collateral deposited. The platform is also secure as it uses BitGo wallet services to provide the safest and most compliant custodial and liquidity solutions. 

Biterest

Biterest is an equally popular crypto lending and borrowing platform. Lenders can customize their loan offers setting the time period, loan amount, annual interest rate, possible discounts and method of transferring the funds. As a borrower, all you have to do is to pick the loan that best fits your needs, apply for it and transfer the required collateral. If the borrower does not find a loan that suits their needs, they too can set their loan requirements that can be accepted by a lender. 

Advantages of using Biterest include:

• Annual rate from as low as 6%
• A loan can have a minimum time period of a day
• The minimum loan amount is the equivalent of 0.0025 BTC
• Zero commission for obtaining the loan through the lender statement 
• Loans can be fiat or the cryptocurrencies of Bitcoin, Ethereum, Litecoin, Bitcoin Cash and XRP
• Biterest supports PayPal, WebMoney, QIWI and Yandex.Money

Bitbond 

Bitbond is one of the oldest Peer-to-peer lending platforms that have been in operation since 2013. The team behind the platform aims at using the platform’s bank-grade technology to cater to the needs of their clients. Bitbond provides small businesses with access to cheap Bitcoin loans with no need for bank accounts for the whole transaction that happens on the BTC blockchain. To get a loan, one simply creates an account and goes through the verification process. 

Concluding thoughts

As the popularity of Bitcoin continues to blossom due to its potential for gains in the crypto markets, its use has gone beyond its consideration as a store of value. BTC can now be used to issue and obtain collateralized loans through peer-to-peer platforms. To qualify for such loans, users must go through rigorous verification procedures to determine their trustworthiness. Once approved, the funds can be used in a variety of ways as set by the borrower’s needs. However, such loans have some drawbacks for both the lender and the borrower. Therefore, an understanding of each Bitcoin loan platform is essential before deciding if it is the right choice.