Wouldn't a trader who was so Bitcoin-savvy they could make returns well in excess of 5-10% whilst maintaining the full value of their loan in BTC on recognised exchanges be smart enough to borrow BTC on less onerous terms from a pure p2p exchange?
@sdouglas As I understand it most other BTC borrowing is done at a fixed rather than floating interest rate, in which case I can't imagine why anyone would borrow from you except in those rare cases where liquidity dries up and they desperately need to borrow? Or why you'd want to lend only during low liquidity situations (or to incompetent borrowers) and only to borrowers whose trading position is exposed by that lack of liquidity?
[1]As a footnote, if I were running a business with that model I'd be happiest if the BTC ecosystem crashed, in which case my BTC liabilities and all the defaulting BTC loans might be worth less than the nice juicy chunks of fiat. It would be like holding subprime mortgages if house prices massively and unexpectedly soared!
To deweller's point - yes, we have risk management algorithms. These algorithms listen to the BTC/fiat exchange rate, and if this moves against the borrower so that the value of the loan could be compromised, we issue stop-loss trades to liquidate their fiat holdings and protect the value of the loan in BTC. This doesn't completely remove risk: there is a chance that liquidity drys up completely and in that case we would have to use some of our capital buffer.
So, for example, you borrow 10 BTC at, say, 20% APR interest for 6 months. You have control over 25 BTC to trade with during that time. At the end of the 6 months, you pay back 11 BTC (10 BTC + 1 BTC interest).
With 25 BTC to work with, you have the potential to gain (or lose) substantially more than the 1 BTC you paid for the privilege of using those 25 BTC during that time.
This seems like a big risk to take for Trademore, but they must have some risk management algorithms worked out on their side.