Diversification is a greatly misunderstood idea in investments in general and its just as true in p2p lending. The idea that you have a Lending Club account and a Prosper account or the idea that you buy some A loans and some E loans does NOT mean you are diversified.

Both big platforms invest in US based consumer unsecured credit, credit given to individuals without the security of collateral. This means that both are the same and this whole asset class is exactly the same.

Returns have been consistently excellent over the last couple of years but investors are taking more risk than they realize. If you had money to put into the stock market, would you invest in AT&T and Verizon and Comcast all the same portfolio and say you are diversified? Of course you aren't diversified. One crazy FCC ruling or some other factor affecting telecom/cable/web and all 3 stocks are tremendously affected, moreso than the market in general.

We are all one crazy SEC ruling or one piece of pro-big bank legislation away from the p2p landscape, and our potential returns, looking very very different. At the moment, this is a low likelihood of occurring but you're fooling yourself if you think it can't or won't happen. Blockbuster Video used to the be way most Americans got access to viewing movies at home too, and on VHS cassettes. Remember those?

It's time to branch out. Enter Bitcoin (BTC).

Most of you know bitcoin from the crazy runup in price and the subsequent crash in price with the closing of the Mt Gox exchange that was trading in BTC. Here's an excellent story on that from Wired (and the aftermath) here. Quietly, BTC has stabilized and increased in price since then and today its at $653 per BTC. Check out the price chart over the last 3 months below.

Real Diversification

What you may not be aware of is that there is a BTC based peer lending platform where loans are made and repaid in BTC. The site is BTCJam. Tell them Stu@p2plending sent you. How does this diversify us?

Currency Diversification

Loans are made, and importantly repaid, only in BTC. If there is too much price fluctuation for your liking, you can lock in an exchange rate of BTC to US Dollars and that amount will be repaid back to you, but still in BTC. If you want to do peer lending outside of the USD, this is the easiest way I've seen.

Geographical Diversification

You can lend to worthy borrowers from all over the world not just in US. One of the biggest parts of the US Consumer credit market covered by LC and Prosper is the US part. Just today, I loaned 0.25 BTC, about $175, to a tech company in Macedonia so they can buy more servers. No way we can do that with the big 2 lenders.

Loan Purpose Diversification

As you already see above, loan are made for many purposes not strictly consumer credit (debt consolidation). I have a couple debt consolidation loans but I have alot of small business loans to emerging markets to those working with emerging technologies.

Here's my very first BTC loan, made yesterday.

This loan, unlike my Macedonia loan, is for a US tech company expanding its data center here in the states. This is an investment I'm pretty comfortable in making and that potential fat 33.11% annual rate is nice too.

Term Diversification

Some BTC loans are as short as 7 days and NONE is more than 1 year. I have it mixed up so my average term is a little more than 6 months. I like that I can turn my money over multiple times and use that to make big returns.

Why BTCJam isn't Mt. Gox

Mt. Gox was an exchange that trade in BTC and many traders stored their BTC at the exchange in order to have quick access to buy and sell. The collapse of the exchange and hacking into the exchange led to the theft of BTC. This will not happen at BTCJam. Why?

My BTC are lent out already. They are not stored on the lending platform. It's a true peer lending platform just like Prosper and LC. They don't have our funds, our borrowers have them to consolidate their loans. They have excellent security. In fact, everything is 2 factor authentication including some very cool use of the Authy phone app

While BTCJam and Mt. Gox both work in the world of BTC, they are nowhere near the same thing just as a Prosper loan is not the same as a Mastercard credit card.

Conclusion

Prosper and Lending Club are great. They are excellent and powerful lending platforms. That being said, they have their limitations. If you don't like the limitations of currency, geography, credit, terms, or loan purpose then BTCJam is something you should check out.