Many people all over the world have come around to the idea of using Bitcoin as an everyday currency. With more and more merchants accepting cryptocurrency as a means of payment, there’s an option to ease away from paper money and credit cards in favor of tech-based assets. But when it comes to more advanced financial dealings, some still view Bitcoin with some skepticism. Take lending, for instance.

There’s a tendency among some Bitcoin skeptics to look at lending as a risky or unsustainable type of investment transaction to try with cryptocurrency. Bitcoin remains largely unregulated around the world, and that very concept will scare some people off. The idea that an investment-related transaction can be made without any kind of bank or financial institution holding participants accountable, or backing up the funds, can be a little bit unsettling on the surface. However, there’s actually precedent suggesting a Bitcoin lending transaction can be upheld via the law, and that stability may lead to more people exploring what can actually be a fairly simple and profitable investment.

Last summer, a United States judge ruled that a man must pay back a loan originally solicited in Bitcoin. In this specific instance, the man had been loaned 11.95 BTC, worth about $10,000 at the time. He was ordered to pay back $67,591. The greater point here is that the lack of regulation behind Bitcoin did not prevent a legal case from ruling in favor of upholding a lending transaction.

But what makes Bitcoin lending appealing to those who do it? Here’s a brief overview of the process.

The general concept of peer-to-peer lending (or P2PL as it’s sometimes abbreviated) is to loan someone else your own funds and gain interest when the loan is repaid. This is the same as any financial loan, except that the peer-to-peer nature of the transaction eliminates the need for a bank to get involved. In other words, no institution is ever controlling the funds. It’s just you and whomever you loan to.

Bitcoin is particularly appealing to some people who want to undertake this sort of passive investment for a couple of reasons:

    • For one, transferring cryptocurrency in a P2PL agreement is arguably a more straightforward process than dealing with ordinary currency.
    • Additionally, the interest rates in BTC-based P2PL are fairly high, usually between 10 and 20 percent.

Cryptocurrency P2PL is not simply something you do with friends or people you know. There are other more productive ways of securing lending agreements that can earn you legitimate financial returns. One way is lending to an actual Bitcoin exchange, which might want to borrow funds for the purpose of leverage transactions. In other words, if an exchange needs to make a transaction with a given amount of BTC, it might borrow half of that BTC from a lender so as to make a bigger trade with less of its own capital. In this case, the exchange’s immediate needs can be met, and you (the loaner) can generate interest when your loan is repaid. Both Bitfinex and Poloniex are exchanges that offer these kinds of arrangements (though it’s worth noting that the former was recently hacked).

The other, perhaps simpler way to find P2PL agreements is to look into any of a number of Bitcoin lending companies that exist to pair lenders with borrowers. BTCjam and Bitbond are two well-known companies in this regard, and can automatically set you up with the lending agreement that suits your purposes.

Ultimately, it’s an intriguing way to put your funds to work for you and generate passive income. Like any investment, cryptocurrency P2PL comes with risks, such as the borrower defaulting on the loan. But with the knowledge that there’s legal precedent for major deals being upheld, and by diversifying your loans across a range of borrowers, you can feel relatively secure about this sort of arrangement. At the very least, it’s something for regular Bitcoin users and/or investors to look into.