Bitcoin micro financing – how does it work?
Microfinance entails providing small loans to financially deprived people and helping small businesses, communities, households, and individuals establish or develop income-generating ventures. Although there is an ongoing debate on microfinance’s effectiveness in poverty reduction, substantial evidence suggests its numerous positive impacts. Thus, it helps the financially underprivileged populations and local economies.
The idea behind micro financing is relatively straightforward; breaking the debt cycle and enabling the recipient of the loans to finance their business ventures independently, without relying on the conventional lenders that usually charge them huge fees. Micro financing allows people excluded from the traditional banking systems to access small loans, with programs tailored to their circumstances and needs.
The Main Characteristics of Micro Finance
Microcredit loans have various characteristics that distinguish them from other credit services. Their main features include the following.
- They are offered on relatively short-term durations, usually lasting 6 to 12 months.
- These loans are in smaller amounts, typically ranging between US$100 to $500 until borrowers can show prove their creditworthiness through regular remittances. Creditworthy borrowers then become eligible for larger loans.
- The average global interest rate for micro financing is about 37%. Although that might seem high to some people, it is relatively lower than most credit alternatives, such as conventional money lenders.
Thanks to Bitcoin and its underlying technology, micro financing institutions would now provide those services with much greater security and convenience. The technology would also facilitate faster payment processing and lower interest rates than the current ones. Bitcoin is a decentralized currency, enabling micro-credit providers and their customers to transact without outside influence.
Blockchain technology would facilitate smart contracts, ensuring easy loan repayment through creating bonds based on the specified terms and conditions. Bitcoin microfinance would make it easier for businesses and individuals to acquire and store virtual assets without going through the banks or crypto exchanges such as Bitcoin System.
How Bitcoin Micro Finance Works
Bitcoin and its underlying blockchain technology are still new concepts but offer numerous benefits for microcredit service providers and customers. Several forward-thinking micro financing institutions have adopted Bitcoin to issue low-cost loans and receive payments from various businesses and individuals worldwide.
Bitcoin microfinance providers have mobile apps and online platforms that clients use to conduct financial transactions. The platforms facilitate various transactions, including instant money transfers, payment of utility bills, and remittances. Like the blockchain, they record the transactions on a permanent digitized ledger.
The apps use a unique algorithm to track users’ transactions and forecast their genuine financial capabilities and creditworthiness. Unlike the conventional economic systems, Bitcoin lending does not involve intermediaries. Instead, customers sign virtual contracts with all the loan issuance and repayment terms on the blockchain. That significantly reduces the transactional cost and duration of payment processing.
Bitcoin microfinance creates more significant opportunities for the service providers to expand their operations and venture into new global markets. Bitcoin’s decentralization and blockchain’s security enable lenders to issue financial resources to businesses and individuals worldwide, with a repayment guarantee on overdue loans.
Bitcoin microfinance borrowers do not need bank accounts or banking services to keep their money. Using and storing Bitcoin only requires a crypto wallet, which you can easily download for free or a small fee from online providers. The lender will send the loan directly to your Bitcoin wallet and vice versa.
Bitcoin micro financing is still in the adoption phase and might take some time to reach the masses. However, it is a significant step towards promoting financial inclusion, making it more convenient for unbanked businesses, individuals and communities around the globe to access capital for economic growth and development.