UPDATE: 11/08/2013

Unfortunately, Coinlenders’ sister site, Inputs.io has been hacked and 4,100 bitcoin have been stolen. This appears to be the end of both Coinlenders and Inputs.io.  It is unfortunate, but  alas expected, that criminals will exploit any weakness to try to steal others’ hard earned wealth. The death of Coinlenders and sites like it, run by people who are essentially unaffiliated entrepreneurs, means that moving forward the Bitcoin space can only be filled with companies that are registered and regulated. It is  unlikely that this will be the last example of hack like this, but from now on we are likely to see greater sophistication and regulation–meaning that the Wild West days of Bitcoin may be coming to an end.

Tradefortress, the owner of these sites is at present apparently doing little to remedy the situation and is currently reimbursing Inputs.io users, at least partially, for their losses. We, myself included, are waiting to find out how the funds currently invested in Coinlenders are going to be handled. Hopefully, as outstanding loans to Coinlenders get paid back, Tradefortress will be able to pay back the majority of the investors.

As recently developments have shown how to track and tag stolen bitcoins, we are also hopeful that moving forward, the tainting of bitcoins will make it less and less profitable for people to hack and steal others’ wealth. We are not there yet, of course, but that is the direction Bitcoin will need to go if it is going to fulfill its full potential.

We at Bitcoin Warrior are very sorry for what has happened to Coinlenders and wish Tradefortress luck as he winds the business down.

“Click.” 6.78595838 BTC

“Click.” 6.78598482 BTC

It is not very exciting watching the last three or four digits of a nine-digit number increase every few seconds. On another level, though, I have found it strangely compelling and I’ve come back to this website several times today to click, and then click again.

This is CoinLenders, a site for people to lend or borrow bitcoin. It is a bit different, though than BTCJam. On that site, borrowers post their requests and lenders sift through the many proposals to find the ones they are willing fund. There is certainly opportunity on BTCJam, but the lenders also bear all of the risk.

At CoinLenders, the lenders are more like investors. They buy CDs for a fixed term (one month, half year, one year) with a locked-in compounded interest rate (currently 25.5 on my CDs). This means that there is no sifting through loan applications or worrying about defaults. Also, a compounded interest rate of 25.5 is pretty incredible in-and-of itself. Interest rates like that are enough to make the careful investor question what is really going on.

So how do they do it? I got in touch with TradeFortress who runs this site as well as a few other bitcoin related sites. He gave me a rundown of their operation.

First and foremost, the people who borrow from CoinLenders are not the people looking for a new car or to fix up a kitchen like you can find on BTCJam; rather, they are bitcoin businesses: exchanges with liquidity problems, local Casascius coin resellers, bitcoin sellers, purchasers of bitcoin stock, etc. CoinLenders is dealing with borrowers who may need large sums of bitcoin on a very short notice. This is something that sites like BTCJam is ill-equipped to deal with. This also means that CoinLenders can charge a premium allowing for the excellent interest rate offered to depositors while still doing well for themselves.

Further, the borrowers need to establish credit through identity verification (ID scan, proof of address, proof of employment, Bitcoin-OTC Link). And finally, and this stands out, the borrowers collateralize their debt with assets like ASICMINER shares, other cryptocurrencies, etc.

One of the major questions I had about borrowing and lending in bitcoin has to do with its volatile exchange rate with national currencies. If the price skyrockets, the borrower has a huge problem. Bitcoin that they borrow at an exchange rate of 100$ today, may be worth 2-300$ when they need to pay it back.

This could be crippling to many borrowers and may contribute to some of the defaults that are seen on BTCJam. Conversely, lenders who lend at 100$ and get paid back at $60 may feel that lending is too much of a risk. For CoinLenders, though, the borrowers are people who are working (nearly) exclusively in the cryptocurrency economy or who are moving in and out of fiat quickly enough that the risk of losses in a spike or crash are minimized.

Of course with operations like this, security is going to be a major concern. Those keeping up with bitcoin news may be following the continuing drama of Bitfloor. It was hacked and had 250,000$ stolen from a backup wallet. It subsequently closed, reopened, closed again and has just recently announced that it starting to allow former customers to withdraw USD funds.

Trusting where we put our bitcoins is one of the big challenges of getting bitcoin generally accepted. CoinLenders is upfront that it is not a bank. Listed clearly on the site is the warning that they are not insured and that you should only invest bitcoin that you are able to lose. They also keep a hot wallet for small withdrawals of bitcoin, but state that for larger withdrawals, time may be needed to gather the funds as loans are repaid.

One more unique aspect of dealing with this site is the fact that you cannot directly send bitcoin to your account. You are required to sign up with Inputs.io, an online wallet also run by TradeFortress. Inputs.io is easy to sign up with, is free, and has the option of using two-factor authentication using Google Authenticator. One advantage of this is that you can fund your account without leaving the CoinLenders site.

TradeFortress explained that in the future, this service with allow people to move bitcoin around seamlessly between supporting services. Since moving bitcoin around quickly and easily is one of the big challenges of bitcoin, this seems like a useful feature, and one that is being taken on by a number of other startups like Pikapay. One day, he sees Inputs.io as having the same kind of functionality as the “sign in with Facebook” button.

Another advantage of Inputs.io is that it restricts the paths for incoming and outgoing bitcoin to one. This means that CoinLenders can focus on the business of lending bitcoin and Inputs.io can deal with the multiple bitcoin deamons for different websites and services.

I asked TradeFortress to tell me something about himself. Other than that he is an Australian, he wasn’t willing to share too much about himself for reasons of “security, regulatory concerns, privacy …” He pointed out that “Bitcoin is very different from how trust works in fiat markets – it allows for totally anonymous markets with trust and reputation built (through) its history, not (by) expensive regulatory licensing.”

A Google search of “TradeFortress” does, in fact, result in a number of hits claiming that he is a scammer. Reading through the posts, though, shows that his most vitriolic attackers are the kind of people that anyone in business is likely to run across occasionally. His trust ranking on Bitcointalk.org is “5,” a high number which is determined based on reviews of people he has done business with. A scan of the people who gave him negative reviews reveals that most of them have negative scores and many are tagged explicitly as being untrustworthy. One comment in his positive reviews caught my eye. He has been instrumental in identifying potential scammers.

TradeFortress says he started CoinLenders because as an early adopter, he was in a position to make loans himself. CoinLenders was really just a way to automate the process so he didn’t have to deal with a dozen different emails, PMs, etc. After a little while, he got loan requests big enough so that he couldn’t fulfill them himself, so he started to accept deposits to help fill those loans.

In the final analysis, when I installed my first wallet, I tried to find an easy way to get some bitcoin risk free to test it out. I went to one of the bitcoin “dust” sites where you can watch videos or look at advertisements for a few satoshi. When I click on the refresh button under my investment at CoinLenders, I am seeing similar amounts. Only, they are accruing every second and they are compounded. If I put more bitcoin in, the rate will accelerate. And, best of all, I don’t have to watch those videos.

I highly recommend that you take a look at CoinLenders.

Edit 10/05/2013: The CoinLenders website has changed its look since we posted this review. They no longer refer to interest rates, but rebates. Also, there are loud disclaimers claiming the site is not real, but for fun only. We are still invested with CoinLenders, but along with the unwillingness of the owner, TradeFortress, to reveal anything of himself, we are not as confident in the site as we were before. Bitcoin as a whole is moving into the light, and business that are legal and upfront will be the winners.

Full Disclosure: As stated in this article I am currently invested in CoinLenders. 

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