“It may have happened inadvertently, but I think Btcpop.co implemented the best version of collateral the world has ever seen”
My first experience with collateral was in the 7th grade. I had to give my teach my lunch card in order to borrow a pencil from her on the first day of class. This use of collateral might be far away from the world of digital currencies and friction-less global payments systems, but the lesson is relevant. If you put collateral down on something and you don’t perform your end of the bargain, you don’t get to eat lunch.
My Collateral Experience at Btcpop
My next most memorable experience with collateral came recently as an investor in a P2P collateral Bitcoin loan at Btcpop.co. I had lent a significant amount of Bitcoin to a trusted borrower, and he unexpectedly defaulted. With the recent rise in Bitcoin price, I had over $1,300 lent out, and with my size portfolio a default that large would put my lending ROI into the negative for years. But, this time I didn’t feel the usual panic I felt when a P2P loan was late, this time I felt little emotion and I just moved on to view the next loan.
When the loan was listed, it was about as good as they come in the industry, and the sizable loan of 88.57 Bitcoin (or $115k at time of writing) was funded in just a matter of hours. The loan was from a trusted borrower who had previously taken out and repaid over 500 Bitcoin worth of loans. So even though his reputation was great, I didn’t invest in the loan because of the A rating of the user or the 500 Btc repayment history. I invested in the loan because it was collateralized over 120% of its value in altcoins and shares. A significant amount of the collateral was Ethereum (which I like and hold) and shares of Btcpop.co (which I also like and hold).
The loan ended up going into collections. The borrower liquidized as much collateral (Ethereum) as needed to get up to date on payments. He then listed a refinancing loan which eventually got funded and he paid off the defaulted loan early in full, and went on his way to straighten things out so he could start paying back his new refinanced loan.
The lack of drama relative to the severity of the event shocked me. While Btcpop.co is a sizeable P2P lending platform, $100k+ in Bitcoin default would have really hurt the company and the many individual investors who had a stake in the loan. But, since it was a collateral loan, the effects were relatively insignificant. It then occurred to me, this system is quite robust and really works. It may have happened inadvertently, but I think Btcpop.co discovered the best version of collateral the world has seen yet. With cryptocurrency, 100% ownership is possible, and the asset is completely transferable holding value all over the world.
Understanding Collateral
The origins of collateral are not very clear or well documented, but it has been around for thousands of years. Wealthy landowners used their property and land as collateral during the times of the Roman Empire. Overtime, collateral made it down to the common man, who would offer his labor or even his freedom in exchange for payment in one form or another.
It was not until the 1930’s when banks and land records were developed enough to support the most well known and commonplace use of collateral today, the home mortgage. Mortgages are the most popular, but collateral is used all over the world in many various shapes and forms. Pawn shops for example, will take your personal items or precious metals as collateral, and lend you up anywhere from 10-90% of the value at a interest rate (usually quite high). In these cases pawn brokers loan only against the collateral, and really could care less about the customer’s credit worthiness.
Collateral in the P2P Lending space
As a early Bitcoin P2P lender I learned the hard way defaults destroy your returns, and unfortunately you cannot trust that many people to pay back their debts. Especially when you are in a new developing industry using a new developing payment method. I did my due diligence as a lender in the beginning, but it was all for not. Payment history didn’t matter, verifications didn’t matter, and personal relationships didn’t even matter. So when collateral loans came around, I immediately saw this as the short-medium term solution for P2P lending with Bitcoin.
Btcpop.co three years ago started out with the plan to do Bitcoin P2P lending differently. One of the ambitious projects they had in mind was collateralized loans. As I know it, the original form of collateral the company wanted to issue was shares traded on the Btcpop Market. These shares were basically mini IPO’s for individuals or companies that issued shares for Bitcoin. Anyone can list an IPO on Btcpop. Btcpop simply provides a platform of trust, and tools to pay dividends and communicate with investors. Btcpop.co itself issued its own shares first on the platform, and let them be held as collateral for loans. That way if you didn’t pay your loans, Btcpop would keep your shares, sell them, and then disperse the funds to investors.
Altcoins as Collateral
Altcoins came later when Btcpop created its very own altcoin exchange, which now has 100+ altcoins that can be bought, sold, and staked within the exchange. When altcoins were first added as collateral for bitcoin loans I thought it was cool, but at the time it wasn’t really practical and there were some transparency issues. At the time there was no way to see what coins a user held in collateral, only the amount against the loan. Now lenders can easily view the breakdown of collateral. During this time when transparency was fixed, the Altcoin market cap raised a couple billion dollars. I now prefer altcoin collateral to many of the various shares held in Btcpop. Ethereum for example now has a $4.4B market cap. So Ether as a form of collateral for a Bitcoin loan begins to make quite a lot of sense.
There are a couple different reasons why I think altcoins could be the best form of collateral the world has ever seen:
- They are Cryptocurrency: It is not a very deep or insightful argument. But, to me it makes the most sense. Cryptocurrency like Bitcoin is the best money the world has ever seen. So different forms of cryptocurrency are the best form of collateral the world has ever seen. Secure digital currency that can travel around the world at the speed of light for a few cents worth of transaction fees is still a truly amazing innovation.
- Universal Global Market: Gold could be argued as a tough competitor for the best collateral. However, when you’re dealing with gold, you’re dealing with something physical. So if a borrower defaulted, you then have to sell that gold to a private party, or a gold buying company to liquidize it. This can be a cumbersome expensive process, especially if you are not in a good location geographically. With cryptocurrency, there is a global market to sell your altcoin. And being digital, there is a fairly global price which you can sell your altcoin for and geography has little or no effect.
- Ownership: When you own the private key, you own the currency. So if someone is holding cryptocurrency as collateral, they are 100% holding it. Pawnshops are mostly secure, but they do hold a small chance of having stolen property taken away or dropping significantly in value if it is later discovered it is stolen. Houses for mortgages, can have liens, dirty titles, and a host of other things that make retaining or gaining ownership cumbersome and expensive
I will concede that altcoins are still quite volatile in price, which for practical purposes does make them less desirable and not the best collateral the world has ever seen…..yet. But, I think if you read this article in 5-10 years from now, you will find it much more true and relevant. Especially if the fiat bubble has popped and assets like gold and houses become just as volatile as altcoins today.
Even though its application as collateral now is still untested, I have a feeling that cryptocurrency will continue to compete and eventually become the worlds best collateral. Taking it one step further, I think that altcoins will eventually become the worlds biggest form of collateral in the form of property ownership. When real estate makes its way to the blockchain, property can be broken up into tokens(otherwise known as altcoins) which can be held by banks or lenders in the next generation of mortgages. But, even if that doesn’t happen you can effectively participate in P2P lending today with altcoins as collateral.