It is heard that rules of Bitcoin lending would be controversial topic and there are five important precautions which could turn Bitcoin lending into a profitable business. This means that the borrower does not have to submit any assets which could be liquidated in case the loan is defaulted.
Rule 1: Better to Diversify Your Investments
Bitcoin lending is better to ensure that your bets are distributed over several loans, instead of one single loan. There are 4 ways to diversify investments namely as,
1. Based on Loan Amount
Fund a small portion of the requested loan, usually between 10-20%. So, if the borrower has requested a 1 BTC loan, fund only 0.2 BTC at the most.
2. Based on Geographical Location
If one part of the globe could be experiencing an economic boom, the other part could be in recession, so better to ensure that you have a good mix of both developed and developing nations in your portfolio.
3. Based on Loan Duration
Loans could be anywhere from a few days to a few years in length. The users are open to select their ratio of long-term to short-term loans.
4. Based on Rating Category
Higher interest rates have a higher chance of low ratings. So try to keep yourself in the middle, holding secured loans with lower rates as well as unsecured ones with slightly higher rates.
Rule 2: Loan Terms for Larger Amounts
In case if borrowers default on their loans, users have two options namely take legal action against the borrower, or sell the claim from this loan to a debt collection agency. Selling the claim is good option for lenders as it assists to avoid the effort required to proceed with legal action. The recovery amount is good with a professional firm collecting the debt than an individual.
RULE 3: Better to check the Purpose and Feasibility of the Project
Before granting a loan, always look at what the individual wants to use the loan for. Good to analyse their feasibility and profitability in the long run. Also try to find alternate assets that the borrower could liquidize to pay off his/ her loan. If the funding for the project and the loan amount does not match, something might be odd.
RULE 4: Beware of Risks and lend only how much you could afford to lose
Suppose if a project fails, or if a borrower refuses to pay out, users shouldn’t be on the verge of bankruptcy. You can keep a small part of earnings in the lending business considering that it is a high-risk investment.
RULE 5: Good to learn from previous Investments
Always better to find a trend in profitable investments and put your money in similar ventures in the future. Rectify yourself if you see too many failed projects and finally allow investments to mature. In conclusion Bitcoin Lending is like investing in start-ups; your money might make good progress as a Fortune 500 firm in the future.
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