After giving it some thought, I realized that lending BTC is quite risky. It is risky because even under the assumption that a borrower is honest and would repay their debt if they could, a sudden rise in the price of BTC would make it difficult or impossible for borrowers to repay their debt. If you lend to an individual, they will simply default. If you invest in a pass through lending operation, what will happen is a number of investors will try to pull their BTC out. They will do this either because they want to take profits on the BTC itself, or they believe the borrowers will not be able to pay back their loans due to the rise in the price of BTC. The operator of the lending pass through will not be able to accommodate all of the payouts and may only recover some of the BTC from the borrowers.
Interestingly, however, lending BTC can sort of act as a hedge against a sudden BTC price drop. If the price of BTC drops, your borrowers will be able to more easily pay back the BTC plus the interest. So, while the value of your BTC holdings will go down, you will suffer fewer defaults in your lending operation.
Thoughts? Any flaws in my reasoning? Discuss.
